9 Steps Of The Mortgage Process: From Pre-Approval To Closing

Your Step-By-Step Guide To The Mortgage Process

The process involved in getting a mortgage loan may seem discouraging, particularly if you are buying a home for the first time.

The good is that you don’t have to charter the course alone. Your mortgage loan officer and real estate agent can provide you with guidance.

It also goes a long way knowing what to expect at every stage of the process so you can be ready to ask the correct questions and make an informed decision. Here’s a comprehensive guide into the mortgage process.

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1. Budgeting: How Much Household Can You Afford?

It’s integral that you take specific steps before you start the mortgage loan process. First and foremost, you should approximate how much home is in your budget range. This enables you to set pragmatic expectations when selecting a mortgage loan and house hunting.

Rather than trying to determine your optimum house purchase cost, it’s better to establish a monthly payable amount you can afford.

From there, you can work your way back using the current mortgage interest rates to come up with our highest house purchasing ability.

What’s added in your mortgage payable amount

Present mortgage interest rates are an integral element of the equation.

An interest rate fluctuation of 1%, for instance, could lower or increase your buying ability in the tens of thousands of dollars.

Likewise, real estate taxes influence your payable amount. They may be diminished in some cities or neighborhoods in your area. And, association levies for a condominium can be different from building to building.   

Homeowners Association (HOA) insurance premiums may also contribute to your monthly payable amount.

When you base your calculations on the highest monthly payable amount rather than the highest house purchase cost, you can be certain that you’ve budgeted for all your rolling housing expenses – not just interest and mortgage principal.

You’ll also have to verify how much is in your savings account. This will help you know how much you’ve got for your deposit and closing costs.

2. Get Pre-Approved For A Loan

When you have a valuation of how much home you can afford, you may begin searching for houses within your budget range. This is the first stage towards you receiving a mortgage loan.

That initial step is to acquire a mortgage pre-approval letter from a financier. The letter will indicate the amount of cash a mortgage lender would allow you to have a loan based on your income, credit, and savings. 

It would be prudent to do this before making an offer on a home.

Many agents and sellers won’t even take into consideration an offer from the buyer unless they are pre-approved, because the seller wants definitive evidence that you’re eligible for a loan to buy the house.

Sellers don’t want a prequalification letter but a preapproval letter because a preapproval shows that you have the financial backing to purchase the house.

NB: Being ‘prequalified’ varies from obtaining a ‘mortgage pre-approval’. 

Both phrases imply that a lender is willing to lend you a specific amount of cash. However, when it comes to realtors, they typically prefer seeing a preapproval letter instead of a prequalification letter.

Why is this? Prequalification letters are not authenticated. They’re simply a rough valuation of your budget derived from a few monetary queries. Conversely, a pre-approval letter has been checked against your W2s, bank statements, credit report, and so forth. It’s a real offer from a mortgage provider to loan to you – not just a rough estimation. 

You’re NOT mandated to remain with your pre-approval lender when you obtain your last mortgage. If you shop around and get an improved deal, you can always change lenders.

Get paired with a mortgage lender to begin your pre-approval process (Jun 8th, 2022)

3. Locate A House And Make An Offer

After getting pre-approved for a mortgage, it’s time for the best part about the whole process: house hunting.

After looking over different properties with your realtor and narrowing down on the house you want, the next thing is making an offer. 

Your realtor will be conversant with the nitty-gritty details of structuring the offer you make. It should accommodate conditions (or contingencies) that must be met before the deal is finalized. 

After making your offer, you’ll also be required to put in your security deposit.

The front money you give out is more of a cash deposit that secures the offer you’ve made on the home and also shows how serious you are about buying the property. The earnest money submitted can be as low as $500 or can reach up to 5% of the total buying price or higher, contingent on local custom.

Talk to your realtor beforehand concerning how high the security deposit can get, and be prepared to make a wire transfer or write a check when your offer is approved – particularly if you’re purchasing from a highly sought-after market. 

4. Select A Mortgage Lender

After you’ve settled for a specific house and your offer has been approved, the next step is choosing the mortgage lender you move forward with.

You can opt to remain with the lender you’ve used for your pre-approval or you can select another mortgage lender. It would be prudent to explore your options with no less than three different mortgage lenders.

When looking for a potential lender, keep in mind that the rates aren’t based on your application only. It’s also contingent on the kind of loan you are getting.

Out of the four main loan plans, VA mortgage rates are usually the lowest, even superseding conventional mortgage rates. FHA and USDA loan rates may appear low-priced superficially, but note that these loans come included with a mandatory mortgage insurance that will raise the mortgage amount you pay every month. Conventional loans provide PMI, however, only if you put in a security deposit of less than 20%.

 Therefore, make a point of exploring various lender’s fees and rates, and also inquire about the kinds of loans you are eligible for.

You may find a better offer available with one lender compared to the one you see online, particularly if you’re a veteran who is eligible to get a VA home loan.

To get more information on how to contrast different offers and select a lender, check: How to shop for a mortgage and compare rates

5. Complete A Full Mortgage Application

After choosing your preferred mortgage lender, the next thing is completing an entire mortgage loan application.

The majority part of this application was finished during the pre-approval phase. However, one or two extra documents will now be required to obtain a loan file through countersigning.

For instance, the lender may require the complete executed Purchase Agreement, along with evidence of your security deposit.

Your mortgage lender may also demand updated liabilities, updated income, and asset documentation, like bank account statements and pay stubs. This procedure may prove to be more intricate if you’re self-employed. You’ll have to indicate your tax returns.

If you get additional income from a long-term disability cover or Social Security, you’ll have to present supporting documentation to your lender.

This assists the lender establish your debt-to-income ratio and also helps them ascertain that you can keep up paying rolling monthly charges.

You can expect a Loan Estimate in three business days which will catalogue the precise rates, terms, and fees of the house loan.

6. Order A Home Inspection

As you undergo the mortgage procedure, you may choose to have a house inspection. Home assessments are often recommended, though some homebuyers opt to relinquish that right in a competitive market.

A comprehensive home assessment provides you with a clear insight into the house beyond what is visible superficially. 

Some of the main areas of focus for a home inspector include:

Plumbing

Roofing

Foundation

Electrical

House Structure

Having a house assessment conducted is crucial because it assists the homebuyer know if the house requires expensive repairs or not. If the house requires major repairs and renovations, you should consider searching for another house.  

On the other hand, if you wish to do the house buying process, what is unearthed during a house assessment can be used in the sales negotiations between seller and buyer, and their realtors.  

7. Have The Home Appraised

Your mortgage lender will also plan for an appraiser to offer an unbiased approximation of the home value you’re purchasing.

Many lenders enlist a third-party service provider not affiliated with the lender directly.

The appraisal will tell you whether you’re paying a fair amount for the house.

Additionally, for the loan to be given the go-ahead at the contracted buying price, the house will also have to be appraised for the contracted buying price.

8. Mortgage Processing And Underwriting

Upon submission of your complete loan application, the mortgage processing starts. As the buyer, this is, for the most part, a waiting period.

However, if you would like to know what transpires in the background, continue reading:

First off, the Loan Processor makes your file for countersigning 

During this period, all essential credit reports are well-organized, along with tax transcripts and your title search.

The info provided in the application, like payment histories and bank deposits, are authenticated. 

Make sure to do a quick response to any demands made during this time to ensure countersigning proceeds as quickly and smoothly as possible.

Any credit problems like collections, late payments, and/or judgements, will need a written explanation.

When the processor has compiled a complete package with all documentation and verifications, the file is forwarded to the underwriter.

In this period, the underwriter will check in info in detail. It’s their job to get to the ‘nitty-gritty’ of the information provided as they search for missing items and possible red flags.

They’ll mainly concentrate of the 3C’s of mortgage underwriting:

Capacity: Will your existing debt load and income enable you to make monthly payments? 

Credit: Are you time-conscious paying your debts?

Collateral: Is the property valuation sufficient collateral for the mortgage loan you’re requesting? (To put it differently: Is the home value and purchase price the same?)

During the countersigning procedure, your loan officer may have some queries for you. Make sure to respond ASAP to facilitate a seamless underwriting.  

9. Closing Day

You’re now in the finish line: Closing!

The mortgage lender will send back the closing documents, together with guidelines to organize them, to the title company or closing lawyer.

Be ready for a huge stack of papers on the closing date. This is conventionally done face-to-face, though e-closing is slowly receiving traction and may prove to be a viable alternative.

Among the more crucial documents is the Closing Disclosure. It should be identical to the Loan Estimates you got when you initially finished filling out your loan application

The Loan Estimate provided expected costs. The Closing Disclosure verifies those prices.

Actually, the two figures should be close to one another. Regulations hinder them from varying too much.

If everything is as it should be, after signing all the requisite documents, you’ll get the keys, and be a fully-fledged homeowner! 

Mortgage Loan Process FAQ

How long does the loan process take for a mortgage?

For many lenders, the entire loan process will take around 6-8 weeks. However, the closing date can be different from one lender and type of loan to the other. Credit unions and banks usually take longer to process the mortgage compared to mortgage companies. What’s more, increased volume can change turn times. It can take up to 60 days to close during busy seasons. 

What does it mean when your mortgage loan is in processing?

Mortgage processing refers to when your personal info is gathered and authenticated. It is the responsibility of the loan processor to arrange your loan documents for the countersignature. They’ll ascertain that all requisite documents are in place before the file is forwarded for underwriting.

What do loan officers look for when applying for a mortgage?

Your loan officer will do a deep-dive into the credit report, reviewing your credit inquiries, disputed accounts, credit utilization, payment history, and credit score. Lenders most want to see a solid borrowing history where you’ve received loans and paid on time. Loan officers will also scrutinize your assets and income to ensure that you are financially stable and are in a position to make monthly payments.  

How long does underwriting take?

The turnaround for underwriting varies greatly depending on the mortgage provider. Most lenders will make a decision within two to three days. However, some credit unions and banks take a week or longer to make an underwriting decision.

How long does an appraisal take?

The on-site property assessment done by the appraiser can take anywhere from30 minutes to a couple of hours. This will largely depend on the size of the house as well as structured talks. The entire window – from the period the valuation is requested by the lender, to when the lender gets the complete appraisal – is usually around five to ten days.

How do you know when your mortgage loan is approved?

Your loan officer will typically email or call you once your loan is authenticated. At times, your loan processor will give you the awesome news.

What happens after a mortgage loan is approved?

There are basically two kinds of mortgage loan approval: final approval and conditional approval. After getting your application, your loan processor or loan officer will get in touch with you with any extra conditions that are needed to get your mortgage approved. You will get your final approval after those conditions have been satisfied.

Why would an underwriter deny a loan?

Underwriters have a responsibility to safeguard the financial freedom of the lender. If your income assets, history, and liabilities indicate you’re a higher risk, the underwriter may reject your request for a loan. Make sure that you submit the latest, accurate and complete documents so your underwriter can have a clear picture of your financial position.

What’s the best loan term for a mortgage?

Shorter loans will cost considerably less with time but will need increased monthly payable amounts. Many mortgages come with 15- or 30-year loan conditions. You can also get 10- or 12-year loans. Most borrowers prefer to go with shorter loan terms whose monthly payable amounts are affordable.

Is a fixed-rate mortgage better than an adjustable-rate mortgage?

A fixed-rate mortgage confined payment and interest rate for the entirety of the loan. An adjustable-rate loan on the other hand sets a fixed rate for some time, but the interests will fluctuate according to market changes every year. Borrows select an ARM if they are planning on refinancing or selling the house in a couple of years. Otherwise, going for ARMs isn’t advisable. 

How much down payment is required?

A big down payment increases your mortgage opportunities; however, you should note that not every house loan program needs a large security deposit. VA and USDA, for instance, provide zero-down mortgages. Conventional loans need a minimum of 3% down, FHA loans go at 3.5% down. Putting in a low security deposit usually needs mortgage insurance, which raises your monthly payable amount.

How much will borrowers pay in closing costs?

Closing costs encompass a slew of fees, such as appraisal fees, title fees, origination fees and other legal charges. Closing costs will be about 2% to 5% of your total loan amount.

What does LTV mean?

Loan-to-value ratio is a measurement of the loan size compared to the value of the house you are purchasing. An LTV of 90% suggests the loan amount, or lien, is 90% of the valuation of the house. This will require 10% down payment.

What credit score is required for a new home loan?

The credit requisites to be a homeowner vary greatly between loan types and lenders. Generally, FHA loans need a credit score of no less than 582; conventional and VA loans need a credit amount score of no less than 620; and USDA loans need a credit score of 640 or more. However, lenders usually set their own score which may be lower or higher.

Why do lenders set up escrow accounts?

A monthly mortgage usually encompasses the homeowners insurance premiums and annual property taxes. The sections of the monthly payable amount enter escrow and are managed by your lender. The lender pays the expenses from escrow. This is because these parties may affect the value of the house.

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