Understanding the Mortgage Loan Process
At this point, you know if you’re ready for homeownership and have a better understanding of what it takes to be a homeowner. Next, you’ll want to know what happens during the mortgage loan process. Being prepared to work with a lender, choosing the right mortgage product, and getting familiar with the loan application process will make the homebuying experience that much easier.
Loan Application, Credit, and Approval Process
Let’s take a deeper look at basic/fundamental financial criteria that lenders regularly use to verify your eligibility and approval. The same basic principles apply to the loan application and approval process, such as the borrower’s credit worthiness. It is important to understand what criteria lenders look for, and how this information is used when deciding on a loan application.
Criteria for Mortgage Readiness:
Let’s talk about the criteria that lenders use to pre-qualify or pre-approve you for a loan, and ultimately to approve or deny the loan. This criterion includes your credit, understanding how much you can afford, cash and other assets, and the property as collateral. Understanding how these factors determine creditworthiness can also help you be better prepared when entering the home purchase process.
Your credit report and credit score are closely reviewed when evaluating the loan. Your credit report shows the lender how likely you are to repay the loan reliably and on time based on your history of payments. Credit reports reflect outstanding debt obligations and payment history, including late payments, collections, and bankruptcies.
Equifax, Experian, and TransUnion are the three main credit reporting agencies. You can request a copy of your credit report for review directly from each bureau or go to the Fair Credit Reporting Act (FCRA) website annualcreditreport.com(opens in a new tab) where you can obtain a free credit report once every 12 months. It may also be a good idea to check your credit report regularly through each credit reporting agency, individually. By staggering when you get your credit report, you can monitor your credit throughout the year in case there are any reporting errors. If you find errors on your report, each credit reporting agency provides instructions on disputing records and getting them corrected. It is important to follow up and correct errors so that your credit report is accurate.
One helpful way to potentially improve your credit score quickly and easily is to have errors corrected or recent credit card payments reflected on your credit report through rapid rescoring. Fees may be associated with rapid rescoring so check with your lender to see if this is a no-charge service they have available. Learn more about your Credit Score here.
|A credit score is a number that indicates your creditworthiness based on your credit history and report. Each credit bureau has their own scoring model and credit score range from 300-850. The higher your score, the more favorably your lender may view your application which may also result in a better interest rate on your loan.|
Don’t forget: During the home buying process, Now is not the time to open new credit card accounts, buy a car, or do anything that could negatively affect your credit score. Before making any large purchases, it’s a good idea to consult with your lender once you’ve been approved for your loan as it could impact your approval.
You will have to verify all your outstanding debt at closing. New debt can jeopardize your ability to close the loan. The lender also may review your credit one last time before lending you the money. Think of it this way—the mortgage loan isn’t guaranteed until you close on it.
Understanding How Much You Can Afford
The amount that you can repay or borrow is based on your income and existing debt and other financial obligations. Several factors are considered when determining how much you can afford for a mortgage loan.
Lenders commonly look at your debt-to-income ratio (DTI) to determine if you will be financially able to repay the loan. DTI is calculated by adding up the amount you pay each month for debts and dividing that amount by your gross monthly income (income before taxes and other deductions). The lower your DTI ratio, the more favorably your lender may view your application. Higher DTI ratios could lead to higher rates, your loan being declined, or a warning that you may struggle to maintain the payments in the future with a change in your financial situation. The ratio requirements may vary slightly among lenders, so consult with your loan officer on your DTI ratio requirements.
In addition to your DTI, employment history and income sources will also be considered by your lender when applying for a mortgage. Stable history of employment may be viewed by a lender that your employment is likely to continue, and your income level should remain steady, giving them greater comfort that you’ll have the income needed to repay the loan. A lender will probably request documentation to verify your income as part of the loan process.
Cash and Other Assets
The value of your savings, investments, properties, and other assets indicate to the lender that you have a history of financial stability and are responsible for repaying obligations. It also shows that you have funds to contribute to the loan in the form of a down payment and have adequate savings. Check out the Down Payment Assistance (DPA)(opens in a new tab) resources as referenced below.
|A larger down payment reduces the lender’s risk and may qualify you for a loan with a lower interest rate, which often equates to savings over the life of a loan. In addition, a down payment of 20% or more may eliminate the need to purchase mortgage insurance, reducing your monthly payments.|
Although a higher down payment may be advantageous, there are many loan programs available that offer down payments as little as 3% of the purchase price when certain eligibility requirements are met. Also, Down Payment Assistance (DPA) can help people with certain qualifications obtain homeownership by reducing their upfront out-of-pocket expenses.
Keep in mind that the value of your assets and savings is often an indicator that you have a good history of managing your money, saving wisely, and successfully repaying loans.
The Property as Collateral
Collateral is the asset that will be used to secure the loan. For a home loan, the collateral is the home itself and may also include the land on which the home is located.
It is very important to understand that because the collateral is used as security for the loan, if you fail to make payments on your loan, the lender may have the ability to take ownership of your home through foreclosure.
If for any reason you’re in a position where you’re likely to miss a payment or become delinquent, you should contact your Lone Star Luxury Agent immediately to explore options that will help you. Since sufficient collateral means less risk for the lender, a home appraisal is required to ensure that the home’s value is enough to cover the loan amount. We discuss the appraisal below in step 5.
6 Steps in the Mortgage Loan Process
The mortgage loan process involves multiple steps. Once you find your mortgage lender, they will help walk you through the entire process. We’ve broken that process down into easy-to-follow steps in order to help you understand what it takes to get a decision on your loan.
Step 1: Choosing a Lender
The right Lender is one of the most important parts of buying a home (unless you are a cash buyer). When securing the best mortgage and loan terms for your needs it is important to consider a few lenders before deciding. Your Lone Star Luxury Agent has a lot of experience in working with different Loan types and Lenders, so please reach out to us unless you have a Lender you have already chosen to work with and you are happy with their services and terms. Read more about Choosing a good Lender here.
The lender is there to explain the mortgage lending process to you. They can give you information on interest rates and fees and start the application process by asking questions needed to get a loan. During the entire loan process, you should stay in contact with your lender and be prepared to answer questions and provide additional information. This will keep your loan moving smoothly and avoid delays.
Step 2: Identifying the Right Mortgage Product for You
Your Lender and your Lone Star Luxury Agent can walk you through the different loan products and help you calculate how much you’ll be able to borrow (also known as your loan amount) and what your down payment and closing costs will be. Each loan product is different with different closing costs and down payments.
Initial Loan Disclosures
The lender will give you a set of disclosures for you to sign and acknowledge your desire to continue the loan process within three days of your application. These disclosures include Loan Estimate details such as:
- The loan amount,
- Your interest rate and Annual Percentage Rate (also known as APR, which is the interest rate plus other fees that will be included over the life of the loan),
- Monthly payment,
- Closing costs and fees,
- Terms of the loan,
- Total amount you will pay over the course of the loan, and
- Any applicable late fees.
The lender is required by law to give you the Loan Estimate within three days of receiving a completed loan application. The Loan Estimate does not mean you are approved for the mortgage. It shows you what loan terms the lender expects to offer if you decide to move forward.
Step 3: Go from Pre-Qualified to Pre-Approved
When first working with a Lender to be pre qualified it is at the start of the process which helps you determine about how much house you can afford, what kind of loan would work best, and about how much money you’ll need to close the deal. For pre-approval you need to provide your lender with your documents they will ask for. This will allow them to run your information through their underwriting so that you be closer to a full loan approval. Pre-qualification can provide a realistic idea of the price tags you might consider when you begin your home search. It can also be viewed favorably when you submit a contract to purchase a home, but not to the same degree as pre-approval.
Pre-Qualification vs. Pre-Approval
Getting pre-qualified provides you with an idea of how much you may borrow. The process is often quick and free.
- You’ll speak to a lender who will collect information about your income and assets, which can be done verbally or through an online form without providing any supporting documentation.
- The lender will normally consider this information along with your credit report and provide an informal estimate of the approved loan amount that you’ll likely receive. Keep in mind that pre-qualification is an estimate.
- You’ll be required to submit a loan application along with documentation of your income and assets to your lender in order to apply for the actual loan approval.
Pre-approval lets the lender inform you as to whether you’ve been approved for a specific loan amount and, as with pre-qualification, it can be done before you’ve chosen a home. In essence, it’s a stronger commitment from the lender. When you get pre-approved for a mortgage by submitting a loan application, you will provide your lender with documents that prove your income and other personal financial records. The lender will do a more in-depth review of your credit history and financial standing. Pre-approval typically takes a bit longer.
Benefits of Pre-Approval
Since pre-approval is a thorough evaluation of your financial health and history, it’s an important step in the homebuying process. The lender will review your income and asset documentation and tell you more accurately whether you qualify for a mortgage. The lender will likely share how much you can borrow as part of the pre-approval. Pre-approval shows that not only are you serious about buying a home, but also that you’re financially qualified to do so.
Step 4: Loan Processing, Documents Ordered & Underwriting
On your path to loan approval the Lender will need a complete view of you, the borrower, and they will want to know more about the property you choose. During this step the Lender will ask for any other necessary documents for your loan file, review and verify your credit report, verify your proof of income, as well as all other needed documents, and financial information, such as income and assets. Once your loan file is complete with the documents that underwriting has asked for, the Lender may go ahead and order the property appraisal discussed in step 5. The underwriter will then decide if the loan is approved, denied or if more information is required. These are all reasons you want to choose a great lender. Just know that there are sloppy Lenders out there, we don’t recommend them or work with them, and we hope you won’t either.
Necessary Documents for the Home Mortgage may include:
Proof of Income
- Pay stubs
- Tax returns
- Social Security Administrator’s award letter (common for people receiving Social Security benefits)
- Child support/alimony documentation
- Depository account statements (checking, savings, money market, certificate of deposit, or other depository accounts)
- Retirement accounts (401k, IRA, Roth IRA, SEP, Keogh)
- Investment accounts (stocks, government bonds, mutual funds, stock options)
- Business assets
- Gift letter (if using gift funds for the down payment or closing costs)
Other Documents Needed May Include
- Photo identification
- Divorce decree, if applicable
- Bankruptcy documentation if any
- Proof of rent payments/copy of lease
- Social Security card, Individual Taxpayer Identification Number (ITIN), or other similar documents
- Business license, if self-employed
- Copy of ratified sales contract
- Download a checklist(opens in a new tab) of documents and information needed.
Lenders will allow you to submit documents and sign paperwork electronically, and some may even have the ability to obtain information, with your approval, such as income and/or asset documents.
Interest Rate Lock
The interest rate on your mortgage could cost or save you thousands of dollars, depending on the current rate and terms set forth by your lender. That’s why it’s important to talk to your lender so you can lock in the interest rate on your mortgage when the timing is right. This will avoid the uncertainty of fluctuating rates, which could cost you more in the long run. When interest rates are increasing, any delays in closing beyond the mortgage lock-in period could cause your rate to go up. This could change your approval status and cause additional changes to your paperwork and loan decision.
Interest Rate Lock Period
When you lock your interest rate, the rate is fixed for a period of time, typically 30, 60, 90, 120 days or more. The longer the lock period, the higher the rate, so you’ll typically select a period that relates to your closing date. Your lender will help you with this.
STEP 5: Home Appraisal
When the timing is right, your Lender will order an Appraisal. A home appraisal leverages a highly-trained professional, called an appraiser, to determine the current appraised value prior to purchase. In addition to the visual inspection of the home, the appraiser will take into consideration recent sales of similar properties in the area, current market trends, and features of the home like square footage, floor plan, and general condition of the property. This is another cost you’ll want to account for in addition to the down payment, inspection, and moving costs.
Why Appraisals Are Usually Required
A home appraisal will establish the market value that will be used to calculate the amount of money that will be lent to you for the mortgage. This is important to the lender because they want to be sure that they understand the value and eligibility of the property as well as the risk they will take for lending you money on that property.
How an Appraisal Works
Your mortgage lender will schedule the appraisal with a licensed appraiser. Although your lender makes the arrangement, you are responsible for the cost of the appraisal. During the appraisal, the appraiser will assess the home’s general condition, age, location, lot size, square footage, number of bedrooms and bathrooms, updates, major structural improvements like remodeling and additions, and any additional features, such as an in-ground swimming pool. Appraisers are trained to avoid giving opinions about the home, its decorations, or cleanliness. When determining the home’s value, an appraiser will consider sales of similar homes within the area as well as their neighborhood and market.
What an Appraisal Determines
An appraisal determines the current appraised market value that the lender will use to underwrite your loan. If the appraisal comes in at less than the purchase price of the home, your lender may not approve your loan or lend you the full amount.
Your lender will give you a copy of the appraisal. If you feel that the value established by the appraiser is very different from what you were expecting, discuss your questions with your lender.
If your loan is not approved, you may need to do one or more of the following:
- Go back to the seller and try to negotiate a lower purchase price for the home
- Ask the lender to allow you to order another appraisal
- Walk away from the sale
Discuss your options with both your lender and your Lone Star Luxury Agent. If an appraisal reflects the same value as the price of the home, or more than that amount, you’ll want to proceed with the original loan amount requested.
Step 6: Closing
Closing is when your homebuying journey becomes a reality. Three days prior to closing your Lender will provide you with a Closing Disclosure which includes your loan terms, down payment amount, projected payments, closing costs, fees to get the loan, and other costs. You and your Lone Star Luxury Agent will go through the Closing Disclosure to makes sure the numbers are all right. Many activities occur at or near your closing date, such as obtaining proof of homeowners insurance, Title insurance is issued, reviewing closing paperwork, providing your down payment or other funds, providing your ID for signing necessary documents in front of a notary, and getting the keys and remotes to your new home. The title company works as a third party to get every one their money and property. We officially close when all parties have signed closing documents and the deal financially funds!
More First Time Home Buyer Info:
+ Rent or Buy.
+ Shopping with a Lone Star Luxury Agent.
+ Finding a Lender.
+ Understanding Debt.
+ Credit Score.
+ Things To Consider Before Buying.
+ Basic Types of Mortgage Loans and Terms.
+ Looking at Types of Homes.
+ Submit a Home Offer, Get an Inspection.
+ Closing your Loan.
+ Welcome to Homeownership.