What Happens First?
When you contact a lender, you will be connected to a loan officer to discuss your specific mortgage needs and financial situation, the property type and location, your price range, as well as how long you plan to own the property. Be prepared to answer questions concerning your credit history, assets, and income.
If you are a first time homebuyer, you will be asked additional questions to determine how much you think you can afford for a monthly payment and what type of loan you want. Based on the information you provide, you will be given several loan scenarios to consider.
Pre-qualification
The first step of the process is the pre-qualification. Based on the information you provide, the lender will issue a "pre-qualification letter" stating the amount you're eligible to borrow in your loan.
My letter is simply a boilerplate with your name, address, etc. "Based on information provided by you concerning your credit profile, income, and assets, you have been pre-qualified for a loan in the amount of X". Blah blah bla...congrats!
You should get this letter before you begin shopping for a home to demonstrate that you are a serious contender when putting in a bid on a property. It's a simple way to show that you made an effort to find out how much you can pay and how much you can spend. Since the pre-qualification is a demonstration of your action but not a real mortgage approval, there is not much value to it. You should update your pre-qualification every 60 days, since everyone in the real estate industry knows that although the pre-qualification shows commitment on your part, it is not really worth the paper it is written on.
The lender should never charge a fee for this service nor run a credit report. If they insist on running your credit, hang up and find someone else. Inquiries on your credit report that do not result in a loan can lower your credit rating. Wait until you decide who to do business with. It's important to remember that this letter is NOT an approval for a loan. The formal application process has not yet begun.
When you receive your pre-qualification letter, you'll also receive a document checklist. It lists all the supporting documents you'll need to provide for the loan application. It is a good idea to start a separate folder for these documents and keep it updated through the process.
Pre-approval
In contrast to a pre-qualification, the "pre-approval" happens when you've actually completed and signed the loan application and have provided the necessary documents for verification of your income, assets, and credit. At this point, the lender will run your credit report and you will probably have to pay an application fee. In my opinion, any application fee over 0 is too much.
This document is really an approval directly from the lender you've chosen. At this point, you don't need to have a specific property in mind. This is merely considered a credit approval and can be used with any qualified property. The pre-approval is good for up to 120 days. If you haven't found a home in that time, your lender can update this document for you simply by obtaining your current pay stubs and bank statements. This is still not a commitment letter until the property information is embedded into the approval. For this, you will need a property, a signed contract, a cancelled down payment check, and an appraisal. At this time you will have a full-blown commitment letter from your lender and will be on your way to the closing.
Application
The loan application is a package of several documents (my package has five). You want to work with a loan officer that completes the forms with you, for you, and just tells you where to sign. When clients say, "just send it to me", I picture them pulling an all-nighter making sure that every item is correct and complete. If I do it, it takes ten minutes of you answering questions.
You can complete them in person or over the phone. I prefer over the phone for speed. Once the application is complete, your loan officer will send the package to you, along with instructions and a list of other documents you'll still need to send in. The required documents differ from borrower to borrower, based on the individual's employment situation and personal finances as well as the loan type. Documents may be sent back and forth by email, overnight, or by snail mail.
Processing
Once your lender receives your loan package, your file is "opened." The documents will be placed in a specific order, the file will be entered into a mortgage-processing program, a credit report will be obtained, and all lender disclosures will be sent to you and other necessary parties. You'll be contacted if your lender has any questions or if any documents are missing. The processing will continue as you and the lender collect the information needed to present the loan for approval.
Underwriting
The lender's underwriter will receive a complete file with all necessary documents pertaining to you and the property you are buying. The underwriter has the final review and determination of the loan approval. Typically, if there is a Fannie Mae or lender approval, the underwriter will simply make sure that your file has all the documents and you meet the criteria of the loan agreement. The underwriter may ask for additional information. Each lender has its own "overlays". Overlays are the list of requirements and criteria to approve your loan for a certain program. Depending on which lender you go to and which person underwrites the loan, different things might be asked of you. If your loan is solid then it can be obtained almost anywhere. If you are borderline, that is when the lender looks a little harder at you. No worry - with a good loan officer, you can get the loan you need.
Once you have an approval with the list of additional items required, you are almost there. Only consider this a commitment letter if you can meet these requirements.
Technology and Your Loan
Over the years, technology has streamlined the mortgage process and sped up the time needed for approval. This is why you can get a commitment letter in two days. Although not necessary, it is nice to know you can! Most lenders have the ability to create a virtual file of your loan application. This is the preferred method to enable the lenders to expedite the process and save thousands of trees. Eventually this will be the only method.
For instance, this is how we do it. You send us your signed "hardcopy" loan papers with all the supporting documents requested. Using the information in the pay stubs, W-2 forms and bank statements you submitted, we enter the data into our mortgage processing software, run your credit report, and upload it into the system showing your liabilities and monthly payments. We make sure the loan programs are what you requested, the numbers and data are all correct, and that it looks pretty perfect.
At this point, we have a complete file and can upload it to any major lender or directly to Fannie Mae for approval. By upload, I mean literally go into (using a partnership password) their mortgage system and transfer our data file into it. In less than 60 seconds, the computer will spit out an approval (we hope) with a list of documents the lender wants to see and questions they have. We go through the itemized list, gather the requested documents to scan and upload into the virtual file. We will answer any questions or correct anything that might be an error in the system. (After all, it is a computer we are working with!)
Within a day or so, a real person at the bank will receive the virtual file via internal email and download it to their computer. Using their computer monitor, they will review all of the documents, make sure everything is in order, and issue the final approval. Loose ends will be put together and you will receive a written commitment letter from the bank. Still, the only people in this chain that have touched the actual papers are you and my office. Here is the key: you want your loan to go to a lender that does everything electronically to speed up the process considerably. If you go to a mortgage broker or banker, you want them to be able to send your loan package electronically to several lenders simultaneously. This will ensure you receive more than one approval to choose from. It will also allow you to have backups in case one approval does not work out. Lastly, if you are approved at a few banks, you can sit back and see which one will give you the best rate, and at the press of a button your loan can be completed and closed there!
With the press of a button, your loan can be processed, approved, locked in, and closed. Of course, there will still be phone calls, emails, and paperwork, but this lightens the load for all.
How can your mortgage be approved so quickly? The system used by the lenders read the information in the virtual file and do a risk assessment of the income, assets, FICO score, liabilities, and loan to value. The computer will decide based on these factors whether the loan is doable and layer the risk. The riskier your loan assessment, the more documents the bank will ask for.
Credit Report
Your lender obtains a "tri-merge" credit report from an authorized credit agency. A tri-merge is a combination of the three major credit bureau reports, showing your payment history and FICO score from each. The lender will use the middle (numerical) score as your rating. The credit report is valid for 120 days. If you haven't purchased a property by then, your lender will obtain a more current report. If nothing has changed, your FICO score should be the same, so do not be concerned.
Each time you go to a different lender, they will run your credit report for their own file, so you will have multiple inquiries. If you go to a mortgage broker or banker, they will usually run your credit report once and assign it over to the lender with your loan. Therefore, you have one inquiry, which will have less effect on your FICO score. This is not to say that the ultimate lender will not run your credit or rerun it right before the loan closes. So try not to do anything big until the closing, such as buy a new car.
Did I say this before? Do not let anybody run your credit report until you are ready to do business with them!
Appraisal
An appraisal determines the market value of your home by comparing the property you want to purchase or refinance to three similar properties that have sold in the past 6 months within a 1-mile radius, preferably in the same neighborhood. Your loan amount is determined by the contract price or the home's appraised value, whichever is lower. Therefore, you want the appraised value to be at least the contract price.
The lender will order the appraisal on your behalf as part of the mortgage application process. If you go to separate banks yourself, they will each want to order their own. If you go to a mortgage banker or broker, they will be able to order one appraisal and transfer it to any lender they do business with. If you have an old appraisal, they will not use it unless it is less than four months old and they approve the appraiser. You are entitled, by law, to receive a copy of your appraisal. Ask for it. I send mine out as part of a post-closing thank you package.
Engineer Report and Other Inspections
After you find a home, you should have various inspections done including engineering, roof, termite, asbestos, mold, radon, water, and septic. The most important test is the engineering inspection, which examines structural items such as the foundation, roof, exterior, windows, and heating and cooling systems - expensive things to fix.
Depending on the area, either you get the inspections before you sign or you sign and have a few days to get them. Either way, you need to get your inspections quickly. You should line up an inspector while shopping for a home, so you have one on standby to use. This way you will know in advance how much the fee is, what it includes, and how much time they need to schedule an appointment.
The realtor will give you a few names of inspectors to call. This is too close for comfort for me. (Sorry- to all my realtor friends out there!) This is the only place in this book where I will tell you to find a service out of the local listings. When you look under Home Inspection, you will see some large franchise companies as well as a few independents. Call a few and interview them.
I recommend you use an engineer to do the inspections rather than a licensed home inspector, simply because of experience and education. The tests typically cost between 0 and 0. If damage is found, you and your realtor can negotiate repairs with the seller. I also recommend taking a reduction in price and then having it fixed yourself to ensure a quality repair. In a hot market, it is harder to negotiate the price down. When the market is soft, sellers are more apt to shave dollars off for repairs to keep a buyer happy.
These tests are not necessary if you're buying a condo or co-op, unless it's in a small building under 8 units. In that case, you have a larger interest in ownership and it will be easier to get the engineer into the nooks and crannies of the building.
Building Information: Co-ops and Condos
A condo/co-op is an apartment purchased in a building owned and/or managed by a company. The ownership of the apartment includes use and occupancy of the public areas. Occupants pay a monthly fee to a management company for all services provided and possible charges associated with the common ownership. So, you want to make sure you are not buying into a bad situation and neither does your lender! Go to the chapter on Property Types to see more information.
The lender will require information on the building and managing corporation, such as financial stability and occupancy. When refinancing an existing co-op loan, as an owner you already have most of the information handy or can get it directly from the management company. If you are purchasing, there will be a slew of paperwork your realtor, attorney, and lender will review. Your realtor will be able to answer questions on subletting, pets, and what type of people live there. Your attorney will receive copies of the financial statements and by-laws and make sure the building is financially sound and stable.
The bank will do a more extensive review of the financials as well as other items. They will look at number of owner-occupied units, insurance, mortgage on the building itself, and cash amount in reserves. If the lender rejects the building, you may want to consider living elsewhere.
There is such a thing called the "Renegade Theory", especially in large urban cities. A renegade - we will define - as one of the first on the scene. So, if the building is in bad shape financially and has a large investor ownership, it might be harder to get good financing. If it is hard to get financing, the units will be priced lower to entice buyers that can come up with alternative financing. Alternatives are higher interest rates on private loans, lenders that specialize in these buildings, or paying all cash. The building could be in an up-and-coming area. This is what my Mother calls a "diamond in the rough." I say if you have the tolerance for risk, go for it. Do your research and it just might pay off for you.
Commitment Letter
Once you're approved for the loan, you'll receive an actual commitment letter from the lender with a loan amount, expiration date, term, locked-in rate (if desired), and property address. Any outstanding conditions required by the underwriter will be listed in the commitment letter. Send this letter to your attorney for their review. Your loan officer and your attorney will go through the details with you. Make sure you can meet all the conditions required by the underwriter because the lender will not give you the money unless you can give the underwriter everything they ask for first. This loan commitment is good for at least 3-4 months and can be updated simply by faxing your current asset and income information to your loan officer...assuming your financial profile remains the same.
Clearing Conditions
You'll need to provide any additional items requested by the lender and listed in the commitment letter prior to closing. Make sure you know exactly what you need to get to the bank in order to "clear" (that's what they call it!) your loan to close. You might need to bring something to the closing also, like proof you sold your house or certified funds from a 401k. There might be impossible requests that you cannot provide and need to work around or you will have to go to another lender.
Your attorney also needs to get some stuff over to the bank, which you do not have to worry about. Remember to shop for insurance a few weeks before the closing, because this is another big thing to comparison shop for.
This is the stressful part, because lenders usually wait until the last minute to do final reviews and request things at the eleventh hour. All parties will work together to smooth out the organized chaos, and you'll close on the property. Although the whole process can be stressful, once you close, you will forget all about it! I promise!
Closing for a Purchase
Once the lender is ready to close, they will begin coordinating the closing date and time with you and all parties involved. Depending on the state you live in, there can be as little as one other person in the room or as many as ten. In New York State, I can count at least four suits in the room! Your lawyer, seller's lawyer, bank attorney, title company representative, realtors ....oh and you!
If you have a mortgage broker or banker, they should serve as the point person for all parties, ordering your closing documents, and arranging for proceeds transferred from your lender. Your attorney will tell you how much money in certified checks you'll need to bring to the closing, typically the day before closing. Don't forget to bring a government-issued, active photo ID to the closing (i.e., driver's license or passport) or you won't be able to sign the required paperwork. Although this whole process can be stressful, once you close, you will forget all about it! Did I say that before?
Closing for Refinances
The closing is more flexible with a refinance because there are usually no time constraints and fewer people involved. Even if the bank is ready to close, you can wait until you're ready or locked in at the lowest rate available.
Depending on the state, the lender will have an attorney, a title company agent, or an escrow agent represent them at the closing and arrange for the money to be dispersed. You are not required to have an attorney represent you at a refinance closing. I think it is neurotic and a waste of money, but so be it if you feel the need! Don't be afraid to ask questions. It is your money and your life! (PS: The closing agent is not paid unless the loan closes, so they will patiently make sure it does.)
At the closing they will pay off your existing mortgage, any second mortgage and any other obligations you wish to pay off directly from the proceeds of the new mortgage. Your final closing costs are itemized and taken directly from your new mortgage proceeds at the closing. Therefore, unless you're taking out less money than you owe, there's no need to bring a check to the closing, but don't forget to bring along your government-issued active photo ID (i.e., driver's license or passport).
Post-closing
After the closing, you'll receive a post-closing package from your lender with a copy of your appraisal and other important documents. Your attorney will also give you a package with copies of all documents signed at closing. Keep these documents in a safe place, and give a copy of your closing statement to your accountant to use for tax purposes. Also, make sure that you receive a copy of your recorded deed and mortgage. This can take up to 6 months, depending on the county the property is in. You need this stuff to sell or refinance later on and will not want to deal with it then.
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