In this article we will break down the basic steps in the mortgage application process. Borrowers will deal with several people and so many documents. Read through these steps to have a good understanding of what to expect, and tips on how you can make the process efficient and what to do when you encounter any problems.
by Christian Scully
At this point you should have already been working with a loan officer, gone through the prequalification process, and been issued a prequalification letter that tells you, your realtor and any seller to whom you submit an offer how much you are qualified to borrow and what type of loan you will be applying for.
If you have not been through the prequalification process, then take a few minutes to start with the previous article on this topic here.
If you have been prequalified, congratulations! If you are still working towards prequalification, stay the path and keep working hard. The next step in the mortgage process is applying for the mortgage. If you are working with a good lender and they did a thorough prequalification, then you should already be in a good position to get through the application process almost effortlessly.
Let’s break down the mortgage application process so you know exactly what to expect and you can be prepared.
Step 1: Have a signed purchase and sale agreement and understand your financing contingency.
You have probably spent weekends touring houses with your realtor, and you have found a house you really want to buy. It fits your budget; you may have even communicated with your loan officer to discuss the numbers specific to this house. If the numbers work, you will work together with your realtor to submit an offer to the seller. If the offer is accepted, the first step will be to sign a purchase and sale agreement and probably submit an earnest money deposit to the seller. The earnest money deposit is an amount of money you agree to pay when you sign the contract to show the seller that you are serious about purchasing the home and are not going to waste their time.
The purchase and sale agreement is a contract that lays out the terms of your agreed upon offer. Make sure you review everything on this document and ask your realtor to explain what each section means. The most important section in the purchase and sales agreement when it comes to your mortgage, is going to likely be the “mortgage contingency” or “financing contingency”.
The mortgage or financing contingency is a date by which you are required to have at least a conditional approval of your mortgage application. It is often set at 30 days from the signing of the contract. This means that you will have 30 days to get the mortgage application submitted and approved. The reason this is important is that problems can arise, and your situation could change in the weeks following the contract date. If you do not successfully get an approved mortgage within the timeframe specified in the financing contingency, you can back out of the deal without losing your earnest money deposit. If you find yourself past the contingency date and you can’t successfully close the mortgage, the seller will keep your earnest money deposit.
+ Better Note: The best way to avoid losing your earnest money deposit is to make sure you are prequalified with a good lender, you have provided your personal financial documents for review, you understand your mortgage contingency date and you do everything your loan officer asks of you as quickly as possible. If the contingency date is approaching and you don’t have an approval yet, your realtor either needs to request an extension from the seller, or you need to back out of the deal.
Step 2: Send your loan officer the purchase and sale agreement and updated personal financial documents.
Your loan officer will need your signed purchase and sale agreement, along with a copy of your earnest money deposit check. If you were very recently prequalified, then you probably don't have to worry about sending updated financial documents at this point. However, shopping for a home can often take months. If this is your case, then get ahead of the game by sending your loan officer your most recent month's paystubs, most recent two months bank statements and most recent quarterly investment or retirement account statements. You will be asked for them anyways, efficiency helps move the process along faster.
Step 3: Your loan officer will complete your application, ask you for any additional information needed and will issue initial loan disclosures to you.
You loan officer needs to now complete the full application, which should already be mostly completed. They may ask you a few questions. Loan applications are standardized, uniform documents designed by the government. Don't feel like the loan officer is only asking you these questions, they have to ask everyone. A loan application can't move to the next step without answering all of the questions.
The final step for the loan officer will be to disclose the loan. This means that the application is complete, and the initial loan disclosures can be generated and sent to you for signature. These documents will include federally required loan disclosures to inform you as the borrower of your rights and what the lender can and cannot do in accordance with the law. They will also include your official Loan Estimate. This is a standardized document that will show you all of the important details of the loan, including the loan amount, interest rate, term and monthly payment, along with an estimated breakdown of the closing costs.
If you are working with a modern lender with decent technology, you will likely be able to electronically sign these disclosures. Don't worry, signing at this point just confirms that you have received them. Nothing is final until the documents are signed at closing.
+ Better Note: The closing costs displayed will likely be a high estimate. Most lenders do not want to underestimate these costs. You should be prepared to cover these costs, but don't be surprised if they come down before closing. Be aware that there are some reasons that the closing costs could actually increase before closing. A big reason would be if you choose to lock a low interest rate that costs you more money to get (points).
Step 4: Your loan will be moved to Processing and an Appraisal will be ordered.
Now that your initial loan disclosures have been signed, your appraisal will be ordered. An appraisal may or may not be required, sometimes a property qualifies for an appraisal waiver. If an appraisal is needed, then a third party appraisal management company will be hired to assign the job to a local appraiser. You will likely be required to pay for the appraisal directly with the appraisal company online. This is typically the only mortgage related expense you will be asked to pay before closing.
The appraiser will visit the subject property and write a report of its condition and compare it to other similar homes that have recently sold nearby in the past twelve months. The appraiser will produce a valuation for the property. The valuation must meet or exceed the purchase price. For example, if you agree to purchase a home for $250,000 - then the home must appraise for at least $250,000. If the home only appraises for $240,000 - then your realtor can attempt to negotiate to get the seller to lower the price, or you would have to pay the shortage, or the difference between the contract price and the appraised value, in cash.
Your loan will now be in the hands of a Processor. They will be responsible for reviewing the application, making sure they have all of your necessary documents filed correctly. The processor will likely contact you directly to ask for any missing or outdated documents.
Step 5: You loan will be moved to Underwriting.
When the processor is confident that your loan file is complete, they will submit it to the Underwriting department. The underwriter is a person responsible for reviewing your submitted loan file and checking that it meets all requirements. If it is a government loan program, it must meet all requirements for the program. If it is a convention loan, it generally needs to meet requirements set by Fannie Mae or Freddie Mac, two government agencies that ultimately will be purchasing the loan from your lender after you close your loan.
Initial underwriting can take generally 1-7 days, depending on the market conditions and how busy the lender is.
Step 6: Your will be issued a conditional approval by the Underwriter.
If everything looks reasonable to the underwriter they will issue you a conditional approval and a commitment letter. The commitment letter shows you and the seller that your loan is conditionally approved and is on track.
A conditional approval means that the loan is approved, but there are some conditions that need to be satisfied. One of these conditions is going to be that the property appraisal must be valued at or above the purchase price. There may be conditions that request further documentation, or ask for an explanation about transactions in your bank statements. Your processor will email you a list of required documents needed to satisfy all the conditions.
+ Better Note: Somewhere along this path your loan officer will be looking to lock your interest rate. Your interest rate is not set in stone until it is locked. Interest rates change every day based on market conditions and your loan officer will be watching for a good opportunity to lock in the best rate. Interest rates cannot be predicted, so it is a bit of a guessing game. The most important thing is that you lock a rate that keeps your monthly payment affordable. Worrying about 0.25% difference between rate and waiting to see if rates drop is generally not worth it. If a rate is available that solves your problem and makes the numbers work, it is often smart to lock it and get it done. The rates can always go up. Check out this article on interest rates for more thoughts on this subject.
Step 7: With all loan conditions satisfied, your loan will be fully approved and Cleared to Close!
Once you have provided the processor with everything they ask for, and your interest rate is locked, your loan should be fully approved and Cleared to Close. This means that everything is set for you to close with your attorney! At this point your attorney will receive all of the loan documents to review. The attorney will review all of the estimated closing costs and make the final corrections. This is typically when the closing costs can come down a bit, but not all the time. The attorney will need to make sure all the taxes are paid on the property and will be working with the seller's attorney to get everything in order.
You will likely be in communication with the attorney's office at this point to schedule your closing if it is in person.
Step 8: You will work with your settlement attorney to sign all final loan documents and get the keys to your new home!
Closing day is here! The closing is when all final loan documents are signed with the attorney. Some attorneys are starting to do electronic closings, but most are still doing in-person closings. Be prepared to be there for up to two hours and sign a lot of documents. Most of these documents you will have seen before in the initial disclosures sent by your loan officer. The seller will likely be there for the first half of the meeting to sign their portion of the documents, then they will leave and you will finish signing the rest. When you are done, you will get the keys and legally own your new home!
+ Better Tip
The most important thing to remember when going through the mortgage application process is that it is a PROCESS. There are necessary steps, and those steps take time. That is why the mortgage or financing contingency is generally set at 30 days out from the purchase and sale agreement date. It can take upwards of 30 days to get to the conditional approval. When you purchase a home, you typically will close within 30-60 days from your signed contract. Usually the biggest delay is caused by the appraisal. There are relatively few appraisers available for a lot of mortgages and so it can take a week or two just to get an appraiser to the home, and then a week or more to get the report back.
Stay patient. Stay patient with your realtor, stay patient with your loan officer and processor. Everybody on your team wants your loan to close. Their income depends on it! Things take time, and it is all a process. It may feel at times like you are jumping through hoops. Just take them one at a time to get to the finish line.
Problems may arise! An appraisal might come in low. Or an FHA appraisal might ask for significant repairs to be made and your realtor will have to negotiate them with the seller. So many different issues can come up, but if you understand it is a process and take each issue one at a time, everything will work out. There is usually a solution for every problem.
Real Estate +
Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey to own and invest in real estate, and helping borrowers navigate the mortgage process as a licensed loan originator.