The Mortgage Loan Process: From Lender Contact to Loan Approval

The best way to assure a successful outcome is to know what to expect, and be prepared for it. The professor has divided his comments into the 8 phases that follow your selection of a lender. This article will take you through the first 5 phases at which point you have received final loan approval. A companion article, available from the professor when you have been “cleared to close,” will take you through the closing.

Phase 1: Initial Contact

What to Expect: You will be contacted by a loan officer the same day you initiate contact, or by the close of business the next day. He wants your business, and his first priority is to learn whether or not you are a viable borrower. For this purpose, he will ask for:

  • Your social security number so he can pull your credit report.
  • Employment status so he can verify that you have a source of income.
  • Available assets, so he can judge how large a down payment you can make:

How to Prepare: The first contact will go more smoothly if you are prepared for it:

  • Look for his calls or emails, and get back promptly.
  • Make a quick estimate of your checking/savings accounts, CDs, other liquid assets, 401Ks and IRAs.
  • Retrieve your last two tax returns, and if you are a W-2 employee, the most recent payroll check stub.
  • Report any debts that may not appear on your credit report, such as a loan from your employer.

Putting everything on the table at the beginning can save a lot of grief later on.

Phase 2: Locking the Price

Locking the price means that the lender is committed to a specified interest rate and loan fees. Third party fees, such as title insurance or mortgage insurance, are not covered by the lock.

What to Expect Before You Lock: At Step 5 of the professor’s 6-step process, you selected the lender and requested the lender to contact you. At that point, you had a price quote but the price was not locked.

The lender might clear you to lock the quoted price after a quick assessment of your preliminary information, which is why locking is designated as phase 2. In most cases, however, the lender is not prepared to lock until the information you have provided has been verified. This can take several days, and if the lock must wait for a completed appraisal of your home, it can take several weeks. In such cases, locking the price becomes phase 3 or phase 4.

Assuming a delay, the lock price is very likely to differ from the price quote you had when you selected the lender. The market price may have changed, or the lender may have had to correct information on your credit score, property value or loan amount that affects the price. The corrected information may be given to you informally by the loan officer, and it also will be shown on the documents that must be provided to you within 3 business days of receipt of your application.

The application returned for your signature will have affirmed or corrected information on the value of your property and the acceptable loan amount. A credit score disclosure document will show the scores reported to the lender, and the one score the lender uses to price your loan. (This will be the middle of 3, or the lower of 2). The Good Faith Estimate (GFE) will show the interest rate and lender fees as of the date it is prepared, consistent with the affirmed or corrected information on your credit score and property value.

Requirements to Lock: Lenders charge for a lock for two reasons. Since locking imposes a cost on lenders, they want some compensation if the borrower elects to drop out after the loan is locked. Requiring borrowers to have “skin in the game” also increases the likelihood that the loan will close.

Unfortunately, the charges to lock and the provisions for refunding lock fees vary widely between lenders, and borrowers seldom have any advance warning of what they are and how they work. In many cases, lock fees are negotiated by loan officers. Disclosure requirements have never applied to lock fees.

The Certified Network Lenders on the professor’s site follow a uniform lock fee policy, as follows:

  1. The borrower pays the lender no more than $195 to lock. This fee is credited back to the borrower at closing, but if the loan does not close there is no refund.
  2. The borrower must pay the appraisal fee, which goes directly to the appraiser and is not refundable.

After you have paid your fee and have been cleared to lock by the lender, it is your decision on when to lock. The professor recommends locking ASAP because you cannot predict the market.

Most lender lock desks are open until 5pm PST, which is 8pm EST. However, if you try to lock after 5pm in your time zone, your loan officer may not be available to put it through unless you have made a prior arrangement.

What to Expect After You Lock: Locks are always contingent on a specified credit score, property value and loan amount. Changes in any of these items after the lock can invalidate the lock. This doesn’t happen very often, avoiding it is a major reason for delaying locks in the first place, but it does happen. In any such case, the new price will be based on the lender’s pricing at the date and time of the original lock.

How to Prepare: Decide on your locking strategy. The professor recommends locking ASAP, because interest rates are not predictable and you don’t want to risk getting caught by a sudden rate spike. Some articles that may help you are When Is the Right Time For a Mortgage Lock?, Should You Lock ASAP? and Can You Time a Lock to Your Advantage?

Note that if you do defer your lock for any reason, you are not vulnerable to any of the lender scams associated with deferred locking that are mentioned in these articles. Step 6 of the professor’s 7-step process (“Price Monitoring”) allows you to monitor the lock prices quoted to you by your lender as they change over time. They will be identical to the prices the lender is posting the same day to shoppers.

Phase 3: Processing Your Loan

Loan processing is the compilation of all the information about you and your transaction that is required by the lender, and by the law. The end product is a folder containing a lot of paper. Most of it consists of documents sent to you which you have filled out and returned. Some of it consists of documents received from third parties.

What to Expect: Documents and more documents. Many of the documents require only a signature, attesting to your having read them, or authorizing the lender to solicit information about you from third parties. Included is the loan application, which is 4 densely packed pages, with 2 additional pages if it is an FHA. However, much of it will be filled in by the lender based on the information you have already provided. The remaining parts that must be filled in by you will be highlighted.

The document package you receive does not cover everything the lender requires of you. The loan officer will transmit another list based on the specifics of your transaction:

How to Prepare: You can begin immediately to gather all the information you will need.

  • If an employee, your last 2 payroll check stubs if paid every 2 weeks, last 4 payroll check stubs if paid weekly, and two years of tax returns.
  • If self-employed, last 2 years of signed Federal Tax Returns.
  • If incorporated, last 2 years of corporate and personal tax returns including K1,s.
  • Statements for the last 2 months covering all deposit accounts and CDs.
  • Statements for the most recent quarter covering all 401Ks, IRAs, and marketable securities.
  • Copy of your homeowners insurance policy or most recent billing statement.
  • If refinancing, a copy of the most recent statement covering your current mortgage.
  • If purchasing a home, a copy of the agreement of sale.
  • If you are now renting from an individual, the last 12 months of canceled rental checks. If you are renting from a company, the standard “Verification of Rental” is sufficient.

Include these documents with the various forms sent out by the lender so it all goes back in one package.

Note: All the documents in the set you receive, along with the documents listed above that you compile, should be returned together. Do not send them in a few at a time. Returning them in one batch reduces the probability that any of the documents get lost or are misplaced. No time is lost because the processor will not proceed until the entire package is received.

Set Aside the GFE: Within three business days of receiving your loan application, you will receive the Good Faith Estimate (GFE), which you should place at the top of your pile. If your loan was not locked when the GFE was issued, you will receive a new GFE when the loan is locked. You should bring the last GFE you receive to the closing to check against the HUD1 settlement statement you receive at closing, which shows the final terms of the loan.

Phase 4: Appraising the Property

The appraisal may be ordered anytime but the practice today is to order it early in the process. Appraisals take longer than they did before the financial crisis, and final loan approval can’t be given without it. You must authorize the appraisal, and you pay for it.

What to Expect: The appraiser might spend 2 to 3 hours at your home measuring, taking pictures of the interior, front, back and street scene. He may ask about additions to the property that are not shown in public records. The appraised value will not be available until 3 or 4 days later.

How to Prepare: Prepare for the appraisal in the same way that you would prepare if you were selling the house. You don’t try to fool the appraiser, but obvious deficiencies such as grass that needs mowing, a defunct car parked on the grass, or a door that squeaks may negatively influence the appraiser’s mindset. Obvious deficiencies create a presumption that there may be hidden deficiencies.

Phase 5: Underwriting the Loan

Your file including the appraisal is passed from the processor to the underwriter, who is responsible for final approval. Your responsibility during this process is to be available to answer questions, and to provide any additional documentation the underwriter requires. Your communications with the underwriter will go through the loan officer or the processor. When the underwriter has finished, you are “cleared to close.”

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