How Are Mortgage Loans Created (Start to Finish)?

There are 4 "milestones" in the creation of a mortgage from start to finish, which are as follows:

1. PROCESSING - the initial stage where the Lender takes a close look at the Borrower "on paper" by pulling credit and gathering such documents as Paystubs, W2 Forms, Tax Returns, Bank Statements, etc.
   • Anticipate Federally Mandated INITIAL LOAN DISCLOSURES at this point that will need to be signed by the BORROWER(S) including a Loan Estimate (LE) that will lay out "estimated" Recurring & Non-Recurring Closing Costs.
2. UNDERWRITING - where the Lender then makes a determination of whether the Borrower(s) will be approved based on the goals they have stated, how they look on paper, and what the approval guidelines allow.
   • Oftentimes, an underwriting approval will have "PRIOR-TO-DOC" (PTD) conditions that will need to be satisfied in order to move on to milestone #3 below.
   • There will also be "PRIOR-TO-FUNDING" (PTF) conditions that must be satisfied in order to move on to milestone #4 below.
   • A document called a CLOSING DISCLOSURE (CD) will ultimately need to be signed by the BORROWER(S) 3 days prior to LOAN DOCUMENTS (milestone #3) actually being signed. The main purpose of the CD is to assure the BORROWER(S) that all Non-Recurring Closing Costs are accurately stated to the exact amount that will appear on the final LOAN DOCUMENTS (including a 3 day "cooling off period" for the BORROWER(S) to accept the terms of this loan prior to signing).
3. LOAN DOCUMENTS (aka LOAN DOCS) - these are the contractual documents that the Borrower(s) will sign in the presence of a Notary Public to memorialize the legal agreement for this loan to be repaid under specific terms (amortization term, interest rate, specific payment schedule, etc.)
   • Should the purpose of the loan be for a REFINANCE of OWNER OCCUPIED Property, there is a 3 Day Right of Recession (ROR) Period that would need to elapse before Funding (milestone #4 below). As an example on this type of loan, if BORROWER(S) signed LOAN DOCS on Monday, 3 days would need to elapse (Tuesday, Wednesday & Thursday), making Friday the first eligible day for the loan to FUND (milestone #4). Sundays and/or Legal Holidays do not count in the ROR timeline, nor can loans FUND on these days.
4. FUNDING - when the Lender "let's go of the money" and makes the loan official. The day of funding marks the first day the Borrower(s) will be charged daily interest (to be billed monthly)
   • Although this milestone marks the end of the LENDER'S work on creating the loan, the actual final step is for the new lien to RECORD (this process is called RECORDING and is also referred to as CONFIRMATION). In the event the loan was used to PURCHASE a home, the RECORDING phase marks the official CHANGE OF OWNERSHIP for the SUBJECT PROPERTY.

Within the above framework, there are additional items to consider:

• PRE-APPROVAL - When the intended use of the mortgage loan is to PURCHASE a new home (as opposed to REFINANCING an existing mortgage), the scrutiny dedicated to the Borrower(s) will be done ahead of time. This process allows both the Borrower(s) aka Buyer(s) to shop for homes with confidence in their ability to perform on obtaining a loan should their offer be accepted. This process also provides the Seller(s) and/or Real Estate Agent(s) with confidence in the Buyer(s) ability to perform, which is critical in determining which offer the Seller will ultimately accept when selling the property.
  • It bears noting that at this point, ONLY THE BORROWER(S) ARE PRE-APPROVED as the Lender does not yet know which property is being purchased (and whether that "Subject Property" will appraise "at value" and/or have a clear title report, no health/safety issues, and/or any HOA specific issues if the property is a Condominium). There is always a possibility that despite the Borrower(s) being Pre-Approved, the Subject Property may end up being problematic. 
  • PRE-APPROVALS should never be confused with PRE-QUALIFICATIONS (aka PRE-QUALS)! PRE-QUALIFICATIONS are short-cuts that forego the necessary scrutiny to determine if the Borrower(s) are actual approvable. As an example, many Lenders who perform PRE-QUALIFICATIONS do not even verify income up front. At some point, the income will need to be verified, and if there was any discrepancy between the income stated by the Borrower(s) versus the income that was verified by the Lender, then an uncomfortable conversation may be imminent. 
  • The bottom line, is that PRE-QUALIFICATIONS should NEVER be considered an acceptable path towards purchasing a home.  As a BUYER, you may end up searching for homes outside of your price range. As a SELLER, you might end up accepting an offer from a BUYER who will end up cancelling their escrow. As a BUYER'S AGENT, you are wasting tremendous time showing homes to your BUYER(S) that will never be possible to close, not to mention your professional credibility will ultimately be questioned by multiple parties. As a SELLER'S AGENT (aka LISTING AGENT), you will be at risk for helping to advise your SELLER to pull their home off the market (forfeiting their opportunity to acquire additional offers) only to have the BUYER(S) cancel subsequently...an event that will ultimately hurt your professional credibility, and possibly the rapport you have with your SELLER(S).

Should you have any questions on the above referenced information (and/or any other mortgage related questions), please feel free to contact me directly...I'm happy to assist.