It is important to understand the loan process if you need to borrow money to purchase your home. This loan is called a mortgage. It uses the house as collateral. Traditionally, mortgages have been paid back over 30 years. A 15-year mortgage is quite common now. Some lenders offer other mortgage lengths, but 30-year and 15-year are the most common. You can get all the details from your mortgage provider. So what's involved in the loan process?
A pre-qualification is sometimes the beginning point of getting a mortgage. Usually a loan officer asks a potential buyer a few basic questions, but doesn't verify the answers. This really doesn't have any impact on the house buying process. The best first step is to start off by getting pre-approved since it is more valuable than pre-qualification.
Getting pre-approved demonstrates to a seller that you are a ready and able buyer. Pre-approvals are fairly simple. Your lender will pull your credit reports. Looking at your payment history and your lines of credit, they can determine an amount for which you can qualify. This does not guarantee a loan. Pre-approval directs you to limit your house search for ones you can afford. It also gives you some leverage in negotiation. Having a letter from a lender that indicates you are ready to make a purchase is helpful. Sometimes it's even necessary.
Once you've determined how much house you can afford, you find one and make an offer. What happens when you have an accepted offer? You begin the loan application process.
Loan Application Process
The loan application process begins with the borrower completing the loan application. This application is simple, but more is required. You will be furnished with a list of information and documents that are required. Some of the items that on this list will likely be:
- employment verification
- pay stubs (2 months)
- W-2s (2 years)
- tax returns (2 years)
- bank account statements (2 months)
- list of assets (property, investments, retirement accounts, etc)
- list of debt (auto, credit card, current mortgage, etc)
- property info (address, expected sales price, etc)
- type of mortgage (fixed or adjustable; conventional, FHA, VA, or USDA; etc)
You will also need to be prepared to explain any blemishes on your credit report - delinquencies, bankruptcies, collections, etc.
Once this information is compiled, you will be furnished with a Good Faith Estimate. This will explain the terms of the mortgage and provide you with a good estimate of the costs associated with your loan. The law requires that the GFE be provided to you within three business days of submitting the application and all necessary documents.
The Good Faith Estimate includes the interest rate, monthly payment of interest and principal plus insurance, and closing costs. Closing costs fees consist of loan origination, title search, pre-paid taxes and insurance, appraisal, inspection, brokerage commission, home warranty, and points (the amount charged to reduce the mortgage interest rate).
Once all the information necessary to supply the Good Faith Estimate had been furnished to the lender, the mortgage loan process begins.
Mortgage Loan Process
Many mortgage lenders have loan processors. These individual gather all the documentation you've provided. The information is reviewed and assembled in a file for the underwriter. The processor will also set in motion securing your credit report and employment verification. The will also order the appraisal and title search. Some order the home inspection while others leave it to you.
Mortgage Loan Underwriting
Underwriting is the process of closely examining all of the information collected as it relates to the home loan you are attempting to get. It is the underwriter's responsibility to determine your capacity to repay the loan. The underwriter also has to ensure that you and the property are eligible for the loan product you are trying to get. This process is to eliminate any potential fraud.
After the thorough review, the underwriter either approves or rejects the loan. An approval may or may not contain some conditions. One condition could be a detailed explanation of a credit blemish.
Interest Rate Lock and Pre-Closing
The interest rate is locked in at a rate following the initial approval. Since interest rates fluctuate each day the bond markets function, it is important to know the exact rate to determine the payment. You and the loan officer determine when the lock happens.
After the loan has been approved by the underwriter, a few more things happen before closing. Title insurance is ordered to make sure you really get the house when you close on it. This protects you from any surprise that someone else can claim ownership of the house. Pre-closing also ensures there are no more questions or unanswered questions about the house, buyer, or loan. When all conditions have been addressed, the closing gets scheduled.
We talk about the five parts of a standard mortgage: collateral, principle, interest, taxes and insurance. Source: Video: Mortgage Basics: What is a Mortgage? – realtor.com®
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