Here is what the home loan process looks like:
Step One: The Loan Application
Filling out a loan application is the first step in obtaining a mortgage. This usually takes place over the phone with the loan officer. Sometimes you can even aply over the internet. You'll be asked for information about employment, earnings, savings, and so forth. You'll be asked to provide documentation, such as W-2's, recent pay stubs, and perhaps even copies of your income tax return. The loan officer will also check your credit report.
It's important to make sure your application is complete and accurate. Missing or incorrect information can delay the loan or can even cause you to be turned down for a loan. A good loan officer will take time with you and not rush through the process.
Step Two: Loan Processing
Once your loan application has been completed, the loan officer passes the application to the processor. The processor's job is to organize the paperwork and make sure all the documentation is complete. It's her job to make sure that the loan officer hasn't missed anything. It's common for the processor to give the borrower a phone call to verify facts or request additional documentation.
The processor will analyze the numbers. She'll evaluate your income and how much cash you are bringing to the deal. She may also update your credit report if there's anything that needs to be updated in your favor.
Step Three: Underwriting
When the processor has gotten all the paperwork in order, she turns the file over to the underwriter. The underwriter's job is, essentially, to check the work of the processor. The underwriter will compare the facts in the applicant's file to the guidelines of the loan type being offered, and make sure that all the conditions are met favorably. As long as you can meet all the guidelines of the loan, your loan will be approved.
Sometimes there's still some missing information at this point that will delay your loan approval. For instance, if an appraisal of the property is required, the appraisal may not have been completed yet. In cases like these, the underwriter will approve the loan, conditional upon meeting certain critieria. Then he will send the loan back to the processor, who will make sure the conditions get met - such as making sure the appraisal comes in at a high enough value.
Step Four: Closing and Funding
Once the loan is approved by the underwriting department, it goes to closing. Closing is the process where the lender's office communicates with the title company to get all the paperwork in order for settlement.
At this stage, the money is made available for the loan. Banks and many mortgage companies use their own money to fund the loan, so no wire transfers from other entities are needed. But in many cases, especially with mortgage brokers, another entity actually funds the loan. The money is wired electronically a day or two ahead of time to make sure it's available for settlement.
At the Settlement Table
The paperwork is done. The conditions of the loan have been met at every stage of the way. The funds are available. Before you get to the settlement table, however, your lender should give you a Good Faith Estimate of Settlement Costs. You should review this document and make sure you understand it before proceeding to settlement.
It all comes together at the settlement table. At settlement, several parties are represented. The buyer and the buyer's real estate agent will be there, as will the seller and his agent. A settlement attorney, who acts on behalf of both the buyer and the seller, conducts the final transaction. If every person has done his job along the way, the settlement will be smooth, with no last-minute problems.
Buyers and sellers will each be given a settlement sheet and asked to review the numbers to make sure they are correct. Since the numbers are often confusing, the agents and attorneys are available to answer any questions that may arise.
Closing Costs: What to Expect
There are many costs associated with closing on a mortgage. In addition to your down payment and the settlement attorney's fees, here's what else you should expect to pay in closing costs for your first time home loan.
- Loan origination fee and discount points - Based on a percentage of the total mortgage cost, this is how lenders are compensated for their services.
- Appraisal fee - $300 to $400. A professional appraiser visits the sale property to determine its value and condition.
- Credit report fee - $50, to determine the borrower's creditworthiness.
- Title company fee - $250 - $350. This is how the title company is compensated for their services of researching the title and preparing the deed.
- Title insurance - Usually 1/2 to 1% of the total mortgage cost. Title insurance ensures that if there is ever a problem with clear title to the property, the lender's money will not be at risk.
- Underwriting fees, document preparation fees, and processing fees - These are costs incurred during the loan application process.
- Recording fees and state and transfer taxes - taxes and fees paid to the locality where the property is located.
- Private mortgage insurance - often required by a lender if your down payment is less than 20% of the property's value.
- Mortgage interest for the current month
- Homeowner's insurance - you will probably need to show proof of this at settlement.
- Property taxes
- Homeowner Association Fees After settlement, most mortgage lenders will sell your loan to another company, who will then take over the servicing of that loan. This is the norm rather than the exception. You may want to ask at settlement what you can expect in this regard.