How Does The Mortgage Loan Process Work ?
1. PrequalificationPrequalification will give you a quick estimate of how much you can borrow for your mortgage. You’ll share basic financial information, including your income, savings and outstanding debts. There’s usually no fee to get prequalified, and you can apply quickly by phone or online. However, getting prequalified doesn’t guarantee you’ll qualify for the mortgage.
2. PreapprovalPreapproval is much more thorough than prequalification. The lender will review your financial situation, similar to when you officially apply for a mortgage. You may be required to pay an application fee.
Expect to submit complete financial documents, including:
- W-2s for the previous two years
- Pay stubs
- Proof of bonuses
- Your most recent federal tax return
- Two to three months of bank and investment statements (such as brokerage, 401(k), IRA, Roth IRA, 403(b) and pension statements)
- Profit and loss statements or 1099 forms (if you own a business)
- A list of your debts, including credit cards, car loans and student loans, along with your minimum monthly payment for each
- Canceled checks for your current rent or mortgage
- Social Security or disability statements
- Alimony and child support payments
- Bankruptcy discharge paperwork
The lender will review your credit report during preapproval. With a preapproval, you’ll learn the maximum amount you can borrow for a mortgage. There could be restrictions to the agreement, such as the lender may need to approve the property, and the preapproval may be rescinded if you lose your job. However, getting preapproved shows your financial situation is most likely strong enough to qualify for a loan.
Getting preapproved will save you time after you find your property because most of the work is complete.
3. ApplicationAfter you’ve found your property, you can formally apply for a mortgage. The mortgage application will ask you questions about the property and your financial situation. A typical application could ask for:
- The address of the home you want to purchase
- The type of home
- The size of the property
- The expected sale price
- An estimate of the home's value
- The annual property taxes
- The homeowners association dues
- The loan amount you want to borrow
If you’ve been preapproved, the lender has already reviewed your financial documents and checked your credit. Otherwise, you’ll need to send in the documents listed for preapproval as part of your application.
Sickler recommends that you be as upfront and accurate with your application as possible, especially with financial issues. That way, you can avoid delays. For example, you may report your W-2 income as $50,000, but it could be lower if you took a few months off for disability. The lender will identify this discrepancy eventually, so it’s best to be clear from the start.
4. Loan estimateAfter you send in your application and documents, the lender must give you a loan estimate within three days of completion as required by federal law, according to the Consumer Financial Protection Bureau. The loan estimate gives you an overview of the mortgage that the lender would give you, based on a preliminary inspection of your application.
This estimate will include the interest rate, monthly payment, total closing costs, estimated taxes, insurance fees and other details of the proposed loan.
The loan estimate is not an official offer, but a prediction. The lender still needs to verify your information, so the actual loan could be different. You have 10 business days to make a decision on the loan estimate.
5. ProcessingIf you accept the estimate, the lender will send your application, credit report and financial documents to be reviewed by a mortgage processor. This company will review your financial documents to make sure they’re accurate, as well as the property title to make sure the house can be legally sold.
If there are any financial red flags, such as missed payments on other loans, the processor will ask you to explain the situation in a letter of circumstances.
6. Additional documentationThe mortgage processor could ask you to submit other documents as part of its review, sometimes due to errors such as a missing page from your tax return.
Government programs may ask for additional documents that aren’t part of the typical application. For example, with VA loans, you’ll be asked for a certificate of eligibility to prove your military service. Be sure to send in these documents as soon as possible to keep your application on schedule.
“Delays happen here because clients didn’t know what to report,” says Sickler. “For example, someone sends in their paycheck, but doesn’t mention they’re paying alimony and child support. The processor’s going to need this information before they can move forward.”
Ideally, your loan officer or mortgage broker will verify that you submitted all the proper documents, but if the processor is missing anything, he or she will ask for it at this point.
7. AppraisalThe lender will hire a professional to complete an appraisal of the property. The appraiser inspects the property to come up with an opinion of how much it’s worth. This could be different than the price you agreed to with the seller.
The appraiser will look at the house size, location, amenities and physical condition to determine the value. You’ll receive a copy of the appraised value of the house within three days of the appraisal. This report will explain how the appraiser determined the value of the house and how it compares with similar properties in the area.
The lender could deny your mortgage if the appraised value is less than the agreed sales price because the property might not be enough collateral for your loan. In this situation, you can make a larger down payment to cover the difference between the sales price and appraisal, negotiate to a lower sales price or ask the seller to lend you the money through a second mortgage. Another option is challenging the appraisal.
“Appraisers typically do a great job, but sometimes they make mistakes, especially if the appraiser isn’t local and doesn’t know the area,” says Blackhurst. “If you think an appraisal is off, you could make a list of comparable sales in your area to show what the price should actually be. There’s no guarantee it’ll work, but it happens.”
8. UnderwritingOnce the mortgage processor has finished the review, a report goes back to the lender so it can decide whether to approve the loan. The lender might approve your mortgage, deny it or ask you for more information. If the lender is satisfied, it will approve your loan after underwriting.
9. Closing disclosureAfter the lender has approved your mortgage, it must send you a closing disclosure document. This document is similar to the loan estimate. The difference is that the numbers on this document are no longer estimates. It lists information about the mortgage including the monthly payment, interest rate and closing costs.
You should compare the closing disclosure to your loan estimate. The Consumer Financial Protection Bureau offers a free tool that you can use to analyze your disclosure. If the numbers are significantly different and throw off your budget, you may need to rethink the purchase. The lender must give you the closing disclosure at least three business days before your closing date so you have time to review before finalizing the sale.
10. InsuranceMost lenders will ask you to buy homeowners insurance to protect their investment.You’ll need to apply for insurance after you’re approved for the loan. The insurance company might not have enough time to complete your application before the closing date. In this case, you’ll receive an insurance binder, which is temporary coverage for the property that lasts 30 days. With an insurance binder, you can close the deal and your regular insurance policy will be ready after the sale.
11. ClosingClosing is the last step of the entire process. You’ll have one last closing meeting with the seller, the real estate agents, a title company representative and possibly a representative from the lender. You may need to have an attorney present, depending on the rules in your state.
During this meeting, you’ll review the final documents for the sale, sign the necessary forms to complete the transfer and pay your down payment plus the closing costs. You should bring your ID, proof of homeowners insurance and a cashier’s check for the payment. You could also set up a wire transfer to pay before closing. However, a personal check will not be accepted.Once you close, you’ll be given the keys to your new home.