I work very closely each day with real estate agents.  A lot of my business comes from agents.  So, as you can imagine, I get at least two calls a day like this...

"Aaron, can I get a loan status on (client's name here)?"

Now, I must say that I am very diligent in the loan application process as a loan originator.  I have been doing this a long time.  I have always been a direct lender with my underwriter under my own roof. 

So by the end of the loan application with the borrower, I have usually asked enough questions to know exactly what challenges we are going to face and I plan the loan accordingly.  I also have regular meetings with the processor on my loans so we deal with challenges quickly. 

We usually don't involve our referral partners in these challenges unless their transaction may be affected or unless the agent has asked that he/she be involved. 

Most of the agents that refer me do so because they expect me to handle these challenges without them.  They have their own transactional challenges to deal with.

As a result, although I get those regular loan status calls hundreds of times yearly, my answer is always true and nearly always the same unless there is a challenge we need to discuss. 

"The loan is great...I have it all handled...we are right on schedule."    The agent hangs up happy, I move on to the rest of my day's work and everything is right in the world.  

I am proud to say that in my entire career, I have had less than five loans declined after I did the loan application and determined we could do the loan.  

Most of those occurred this year with rapidly-changing loan guidelines that changed after application.  This is not to boast.  Many direct lenders and retail bankers out there can make similar claims.

So yesterday, I got a call from an agent, Alex, who is working with me for the first time.  "Aaron, how are we doing on the Simmons loan?" he asked.

"Alex, the loan is great....I have it all handled...we are right on schedule," I said as usual, which was all true. 

Just as I was about to hang up the phone he said, "Thanks, but can you tell me where we are in the process?"

I have to admit I was a bit taken back.  I asked myself, "does he really want to know where we are in the process or is he just trying to get an additional level of comfort because we haven't worked together before?"

So, I asked.  "Alex, do you really want to know exactly where we are in the loan process or do you want just a general idea?" 

He said, "I am really new at this so I would really like an explanation of how the loan process works, if you don't mind." 

Now those of you who know me, or read my posts, or my newsletters, know I am all about the education.  So, I was thrilled to give Alex a blow-by-blow description of the loan process and where his client's loan was.  So tonight, I will give it to you as well.

Regardless of the loan program and the bank you end up with, each loan has several key common factors. They are mostly related to your ability to make your house payment in the future and protection for the lender.

The most important factors are:

1) your credit

2) your income

3) your assets

4) your previous housing payment/rental history

5) the property type

Your loan is going to go through a variety of steps. First and foremost, your credit is pulled to quickly determine if you are a qualified candidate for a home loan.

Nearly all experienced lenders can tell you if you are a candidate at the moment they review your credit. The very best also know, at the same moment, where they should take your loan to get you the best rate.  Or what program will work best for you to get you the very best deal possible.

The next step is to take the loan application. The loan officer will explain the types of mortgage loans available to you, the interest rates and fees and, usually, the qualification requirements or the guidelines for the program.

Based on what you disclose to your loan officer, he should be able to help you pick the best loan program for your needs.

It is very important that you are completely honest with your loan officer. We usually find out when you are not being completely honest. It is always important to understand we are completely on your side. We want you to get your loan. That's how we get paid.

It's better for you to be honest with bad information, or information you are a bit embarrassed about, at the beginning of the process. If we find out later, we may have to scramble to help you. If we have the information early, we can usually find a way to help and make it still work.

Let me give you an example of why this is so important.

You sit in my office and I ask you, "How much money do you have in total liquid assets, checking, savings, etc?"

You say, "Around $5,000." I say, "Great! This loan program, with the most competitive rates, requires you to have $4600 in reserves at close, so that's perfect!!!"

During processing we find out that you really have $3,000 in liquid assets. You are short of the reserve requirement for this program.   I must now find you a new loan program that does not require these reserves.

That probably means finding a different program. And that could mean a change in your rate. The rate you were quoted is now is serious jeopardy and depending on how far along your loan is on process, so is your closing date. 

Be truthful.  There is nothing more important to this process.

OK, so we complete the loan application where you have been completely honest. We find a rate you like and we can lock it then or we can wait. You want to make sure, once you are locked, you get an email or other commitment from the lender.

The loan officer should be pretty familiar with the guidelines of the loan he helped you choose. He should know then what to ask of you. Items like W2s, paycheck stubs, lease agreements, tax returns, letters from an accountant, etc.

If he doesn't ask, ask him. You want the information in his hands as soon as possible.

Next, the completed loan application, and hopefully most of your required items, will go to a Processor.

Keep in mind, I am only describing my experience here. Other lenders may have a slightly different process. This is only meant to give you a general idea of how the process works and what to expect.

The Processor is going to gather and review information from most of the third-parties associated with your loan like the appraisal, the preliminary title report, and the purchase agreement. 

The processor is going to confirm your employment and income, verify your assets, verify your previous housing payment/rental history, order condo certifications, if necessary, and determine the exact property type you are buying.

They will also review the documentation required for the loan program you chose like your W2's, tax returns, paycheck stubs, bank statements, etc.

If you are doing a stated income loan, this person is just confirming your employment, not your income. If you are doing a stated asset loan, this person is not confirming that either. If you go No Doc, they don't confirm much.  Many of those programs are less available today but it's still important in this discussion.

It is important to note that the less the verifiable documentation, the higher the rate, and possibly the required down payment.

Stated income loans usually have a higher rate than full verification of income loans, and may require more money down. Stating assets is usually a higher rate than full verification of assets, and may require more down. No Doc rates are usually higher than both, and usually require more down.

Depending on the experience of your Processor, they likely do not make any decisions about your loan nor do they do a very detailed analysis of these verifications. 

This person's job is simply to gather information, review it and process the loan. Obviously, they try and catch things to warn the loan officer but for the most part their job is to gather the items necessary for your loan.

This is where an experienced Processor can really make or break a loan officer.  The best loan processors know how to review the information closely to make sure it fits loan guidelines.   They also will warn the loan officer if there are discrepancies in what you told him at application vs. what they discover during the process.

Depending on how fast the third parties respond to all of our requests, this process can take a few days to a few weeks.  Two weeks is a fair average.  If your loan is a rush, we make this happen much quicker.

It is the goal of the processor to hand your file into an Underwriter and have it come back with little to no conditions.  Guidelines can change frequently as we have seen recently.  They can change in the middle of the loan process.  Therefore its important that the processor be experienced and on top of recent changes.

All of the elements of the loan are then assembled into a loan package and then moved on to the Underwriter.

The next person to get your loan will likely be an Underwriter. This person has much more experience about the loan guidelines for the program you have chosen with your loan officer. They analyze the findings of the loan officer and processor and they review the assembled loan package.

They compare this package to the current guidelines of the bank to make sure it qualifies.

How many times have you heard clients say, "why didn't you ask me for this earlier?"  This is the reason why.  The underwriter is the last person seeing your file. 

It is their job to decide to whether they are comfortable with your risk-level and your ability to repay the loan.  They can ask for whatever they want to ask for to make them more comfortable.   And sometimes they do.

If something was discovered in the loan process is different than that which was originally disclosed to the loan officer, you may be forced to change programs.  You want this done before you get to underwriting.

Things like judgments, a mortgage late that did not appear on your credit report, your last landlord was your sister, unpaid child support, recent collections, a new car purchase that changed your debt to income ratio, the condo you bought has too many investors and is not eligible for the chosen program, recent credit lates, and many, many more are all things experienced loan processors are looking for. 

If they don't catch it, you can bet the underwriter will.

For example, you said you make $44,000 per year and you really make $41,800. Or a mortgage rating was ordered on you and a late posted recently.  Or you owe child support you didn't disclose.

This kind of change, even seemingly minor to you, can force a change in loan programs.  A change in the loan program could mean a change in the rate and the terms.

Once again, it is very important that you are completely honest with us early in the process. We are here to help you get the best loan program possible for your needs. We can only do this if we know the details.

In my experience, most of the challenges you find in mortgages today are "funds to close" and "reserves."

Experienced real estate agents ask their clients important questions.  It is not only important for you to have your lender pre-qualify your client, credit-wise, before you take them house-hunting but make sure he asks more detailed questions about their finances like how much they will have in reserves after the down payment and closing costs.

Lenders want to make sure you are financially capable of making this new payment. Even if you do 100% financing and the seller is contributing all closing costs, you are probably going to need to be able to show a few months of reserves in the bank.

You would be amazed at how difficult that condition is.  If you are unable to show reserves, you may not get the same rate as someone who can.

Lenders will look to source of funds with which you will make the down payment, pay closing costs and fees, and show reserves.

Gifts from a relative or elsewhere may sometimes be used, but must be verified in writing and you usually can't use gift funds for reserves.

You can't just have $5,000 show up in your bank account a week before you close without a reasonable explanation of where it came from.

I recently did 100% financing on a loan and the seller contributing all closing costs.  At the loan application, I told the borrower that he needed to show four month's reserves to qualify for this loan.  This meant $10,000+ in reserves, which he said he had.

When we verified his liquid assets, two weeks later, he had a total of $14. I called him.

He said, "Dude, I had to take care of some things."

Here is a guy asking a bank to give him 100% of the money to buy a home, he asks the seller to pay all closing costs, but then let's his account run down from $10,000 to $14 in less than two weeks with a "less-than-stellar" explanation. 

Would you be comfortable making a $400,000 loan to him??

No matter how hard your lenders tries, and no matter how well we communicate, ultimately, we need cooperation from the borrower.

Why do lenders care so much about "sourced funds?" Real estate is not an uncommon place to launder illegal drug money. They also want to make sure you are the actual buyer of the house and not your old college roommate who wants to invest in Vegas but can't qualify so you use his money and your credit to buy a house.

They also want to make sure you haven't acquired additional undisclosed debts.

For example, you borrow $15,000 from your friend at 10% interest to close your house. You just added $1,500 a year in additional liabilities but never told the mortgage lender, who wants to know your debt to income ratio.

We try and tackle all of these challenges and deal with them before it gets to underwriting so your loan would not likely make it to underwriting without us knowing you will get final approval. 

It is rare for a loan to be declined after you have been pre-approved by an experienced loan officer with an experienced processor on his team.

As a result, it is the job of our Underwriter to make sure that every guideline is met to the bank's satisfaction.

Expect the file to be in underwriting one day to one week, depending on the challenges and their requests, if any.

The most common items that underwriters will look at, and may request at the 11th hour, are explanations for irregular deposits, settlement statements from the sale of previous homes, documentation on additional properties you own that were not properly disclosed, a letter from your landlord, an explanation letter from you for something in your financial past, or a credit supplement on a late payment you are disputing.

Although we believe in making the process as easy as possible for you, the list can go on and on.

Keep in mind, you are asking for a loan for $100,000's or even $1,000,000's. You are asking the lender to invest in you.  In my opinion, it is not unfair for the bank to want more information from you or some back-up to other information before making an investment in you.

Once again, it is important to always keep one thing in mind...we are completely and totally on your side!!!

Our business is getting you the loan. If we ask you for something, it is solely to make sure we can complete your transaction and you can successfully move into your new home as soon as possible.

Once the file leaves underwriting, it is often sent back to the processors to make sure all of the underwriting requests and conditions are met.  This usually takes a day or so.

It is very rare for an Underwriter to review a loan, approve it unconditionally on the spot, and then let docs go out and fund.

There are almost always additional conditions they want met. Some are easy and just require us to do something in-house. Others may require your assistance.

Once those are met, the file goes back to the Underwriter for the final conditions sign-off before loan docs. This can take from a few hours to a few days, depending on how busy they are.

The file then goes into our closing department where your loan docs are professionally prepared and then emailed to the Title/Escrow Company.  This can take from a few hours to a day.

Your Escrow Officer will call you to set up an appointment to sign your loan docs.  You will also bring in any additional, required funds at that time. By this time, the seller of your home should have signed all of the closing docs necessary as well.

At that appointment, it is important to review a page called the Lender's Instructions. This will tell you any other last conditions that need to be met before we can fund your loan.  Most of these conditions will be between us and the Title/Escrow Company; however it is very important that you review them carefully.

Even though you have signed all of your loan docs, your loan will not fund until all of those final conditions are met. Borrowers rarely understand this because this page is usually blown right over by the title/escrow officer.

Make sure your escrow officer goes over this sheet with you in detail.

After you sign your loan docs, they will send the docs back to us so we can check them in. We then review them to make sure all of the lender's instructions have been met and then we fund your loan in-house, usually by check or wire.

Your loan will fund as soon as we have been able to successfully meet all of the conditions as described on the Lender's Instructions. Plan on allowing a day for us to fund from when you signed.

The Title/Escrow Company receives the funds from us, they record the transaction with the County Recorder's office to make it legal, and that's it!!! Your loan is complete and the house is yours!

Here are a few tips.

Make sure the lines of communication are open with your lender and be honest with them early in the process. Be particularly honest about your income, your employment history, and your liquid assets.

Your contact person should always be the loan officer. Although someone in the lender's processing department may call you for more information, and you should answer them, I believe it is important that you communicate mainly thru the loan officer. He usually knows the most about your loan or will research for you.

It may take several weeks to process the application. Frequent calls to the lender will not necessarily speed things up. Email is usually the best way to get updates.  It allows the lender some time to go speak with the processing staff, get a real status on your file, and then answer you.

Your lender, the processing staff, and even the underwriters are looking for ways to approve your loan, not reject it. They will only ask you for information pertinent to helping you get your loan. You need to be honest with them and get them any information they ask you for in a timely manner. Don't take any request too personally.

The requests are procedural, they are never personal. Some of this information is going to be very personal, like questions about your income and assets.

Please understand that this information is being used solely to get you your home loan. We will never ask you for more than required but please understand that you are asking the lender to make a sizable investment in you. A $300,000 mortgage loan is going to require more paperwork, more due diligence, and even more legal documentation than a car loan for $40,000 or a $5,000 credit card. This is to protect you and the bank.

When you go to your interview with your loan officer be fully prepared to provide good, honest documentation. By being prepared you will help ensure prompt processing of your application and fewer questions later on. Ask him what he wants you to bring.

At a minimum, make sure you have addresses for places you have lived in the last two years and your landlord's contact info, have your employer's contact information for the last two years, and have the information ready for all of your liquid assets like checking accounts, savings accounts, 401Ks, CDs, etc.

Be accessible if the lender needs additional information or documents during processing. Responding quickly to our requests will help keep the process on schedule. If you go out of town late in the process, make sure someone can communicate for you.

Obtaining a mortgage loan should not diminish your excitement in buying a new house. The key is simply understanding, which, as I have described here, may not be so simple.

If you understand a little about the lending process, communicate with your lender, and are prepared to do what's asked of you, the loan simply becomes a short, less stressful, part of the procedure necessary in owning a new home.

So next time you call your preferred lender and ask "can I get a loan status on (client's name here)?"  Take a deep breath and hope he says, "the loan is great...I have it all handled...we are right on schedule."