Demystifying The Mortgage Approval Process

 

Let's assume you have found the house of your dreams and have a signed purchase contract, what are the next steps in the home buying process? Can you close right away? How long will it take close on your home? Even if you are paying cash to buy the home there is still a lot of work that must be done before we can get you to the closing table – even more if you are getting a mortgage. Let’s take a closer look at each of the steps. Hopefully, this will demystify the process and help you help your lender streamline the path from contract signing to the closing table.

Loan approval steps:

1. Negotiate the Loan - Loan Officer
2. Process the Loan - Loan Processor
3. Home Inspection - Home Inspector
4. Home Appraisal - Appraiser
5. Loan Underwritten - Underwriter
6. Closing Documents Prepared - Closer
7. Closing Documents Signed - Settlement Agent. 

Negotiation - For the sake of the conversation we are going to assume you have already been pre-approved for a mortgage. If this is the case you will have already filled out the loan application, discussed interest rates, as well as different loan options with your loan officer. If you have not already decided which loan type (FHA, Conventional, VA, USDA,) is best for you and your situation you will now make that decision. Along with that decision your real estate agent will send a copy of the signed purchase contract to your loan officer. With the signed purchase contract in hand the loan officer will begin the process of getting full loan approval so you can close.

Before your loan can move to the next step you will need to sign your something called your Initial Disclosures. There are two reasons you need to sign these disclosures. The first reason is to verify that the information on the application and the terms of the loan as outlined in the disclosures are correct. The second reason is because it signals your intent to proceed with the loan.  Because we live in a digital age your lender will ask as well as prefer that you do this via email. It is important that you sign the disclosures right away so your lender can start processing your loan without delay. Once you have signed your disclosures your loan is ready for the next step, Processing.  

Loan Processing – This part of the process will be handled by your Loan Processor. This individual(s) is responsible for assembling your documentation and preparing it for underwriting. In addition to document preparation your processor will:

• Order a title search - usually takes 5-7 days
• Order your appraisal - usually takes 10 days but can take up to 14 days
• Get your homeowners insurance set up with the lender as the mortgagee
• Reach out to you regarding any recent inquiries on your credit report as well as all addresses that are showing as residences within the past 24 months. Your processor will request you sign a letter with the explanation you provide.

While your loan is being processed it is typical for you, the borrower, to pay for a home inspection.

Home Inspection – While not generally required to purchase a home getting a home inspection is a wise decision. The home inspector will do a thorough visual inspection of the home looking for any problems you need to be aware of before continuing with your purchase. Some common problems the inspector will look for are:

1. Damage from pests, such as termites
2. Water damage
3. Roof and chimney damage
4. Plumbing issues
5. Verify the septic system is healthy (assuming you are not on sewer)
6. Electrical Issues
7. Structural Issues
8. And others...

If the home inspection comes back showing the home needs thousands of dollars in repairs there is no sense ordering the appraisal if you decide not to buy the home. It is not recommended that you pay for an appraisal until the home passes inspection.

Home Appraisal – Assuming the home passes inspection the next step is to have the home appraised. The appraiser’s job is to determine the market value of the home by comparing the sales prices of similar homes in the neighborhood. The appraiser will measure the square footage and take pictures of the home inside and out. It is important that the home appraise for at least what the seller is asking or higher. If the home appraises for less than what the seller is asking your lender is not going to approve a loan amount higher than the homes fair market value. If the home appraises for less then what the seller is asking you can request a reevaluation from the appraiser, pay for another appraisal from a different appraisal management company, renegotiate with the seller, or come out of pocket for the difference between what the home appraised for and what the seller is asking.

Keep in mind that once the appraisal is ordered it usually takes 10 days to receive the appraisal report. If the market is hot is take up to 14 days to get the appraisal report back. If you are in a big rush you can pay for a rushed appraisal. Once the appraisal report is received it is time to send all of your documentation to underwriting.

Underwriting – The underwriter assigned to your loan is ultimately responsible for giving your loan a thumbs up or a thumbs down. The underwriter compares the documents in your file with loan guidelines to make sure they comply. They will check your credit scores to make sure they are in line for whatever loan program you chose. They will also make sure you can afford the house by checking your paystubs to make sure the amount on the application is consistent with what you earn. Unlike the loan officer and processor, you will probably never speak to the underwriter.

After reviewing your file, the underwriter will do one of two things. Either one, they will approve your loan, or two, they will approve the loan with conditions. When a loan is conditionally approved it means that once the conditions are met the loan will them move on to closing. Usually, the underwriting conditions include things like getting updated documentation such as pay stubs and banks statements. When you loan officer or processor reaches out to you to satisfy these conditions you will know you are getting close to closing.  

Closer – Once your loan is approved by underwriting it will go to someone in the lenders closing department who will prepare the final closing documents that will be sent to the settlement agent.

Closing Documents Signed – The title of the settlement agent varies depending on the state you are closing in. Some states require the closing agent to be an attorney while other states only require an escrow agent. In either case, the settlement agent receives very specific instructions from the lender explaining what they need to fund the loan. The settlement agent verifies the identity of all the parties signing and oversees the signing process. They are responsible for ensuring the sale of the home proceeds according to the laws in the state where the closing is taking place as well as with the lender’s requirements. Borrowers often get confused thinking the closing agent represents them when in fact the settlement agent represents the lender. Once all the closing documents are signed the settlement agent then disperses the funds according to the lender’s instructions.

At the end of the day how long does this process usually take? The answer will ultimately depend on the lender you choose. A reasonable time frame to budget for this process is 30 days, though 45 days is safer. That isn’t to say that it can’t be done faster - the mortgage company where I work routinely gets loans closed in 21 days, sometimes less! The reason I recommend budgeting for 30-45 days is to give yourself a cushion should you encounter problems along the way. Some examples of where this might happen is during the title search or when trying to close on a government backed loan like USDA. USDA loans must be underwritten twice – once by the lender and then again by USDA.

As you can see there is a lot of moving parts as well as actors involved in taking your home loan from start to final approval and closing. While most of the process is out of your control the part you can control is getting the documents your lender requests right away, scanning them clearly and completely, and formatting them into a PDF.

Hopefully, this article has illuminated how the home loan approval process works. Now that you understand the steps that must be taken my wish is that it will help facilitate a smooth and relatively easy home buying experience. If you have any further questions don’t hesitate to reach out.

Benjamin S Hanks

NMLS# 1855439

404-955-1253

bhanks@mortgageright.com

HanksHomeLoans.com