The Mortgage Process, Explained


Getting a mortgage can be a complex, daunting task. There is a wide range of mortgages to choose from, you will need to gather a lot of documents to apply for them, and even working out the monthly cost of your future mortgage can be difficult.

Nevertheless, the mortgage process can be broken into a number of well-defined steps. Most people go through six distinct stages when they are looking for a new mortgage: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing.

In this guide, we’ll explain everything you need to know about each of these steps.

Key Takeaways

  • The mortgage process is complicated but can be broken into a number of steps: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing.
  • It’s a good idea to get pre-approval for a mortgage before you start looking for a property, so you know what you can afford.
  • Once you’ve found a property and put in an offer, expect the mortgage closing process to take up to 45 days to complete.
  • Check all of your paperwork carefully. You will be paying for your mortgage for a long time, so the small print can end up costing you a lot of money.

1. Get Your Pre-Approval

The first steps in getting a mortgage are to work out what kind of mortgage is best for you, how much you can afford to pay, and to obtain pre-approval for this loan. In order to find the right type of mortgage, familiarize yourself with the different types of mortgage and find the one that is right for you. You’ll need to take into account a number of factors when it comes to choosing a mortgage, but the most important is to have an accurate idea of your monthly costs. This will include not just paying back the “principal” loan, but also interest payments. And if you aren’t able to make a 20% downpayment on a property, you’ll also need to pay for private mortgage insurance (PMI). A mortgage calculator can show you the impact of different rates on your monthly payment. 

Once you have an idea of the type of mortgage you would like, you can approach mortgage lenders for pre-approval. A pre-approval is a document that states the maximum amount your mortgage lender is willing to loan to you. You can get pre-approved quite quickly—your mortgage lender will just need to run a three-bureau credit report (called a tri-merge) that shows your credit score and credit history as reported by third-party credit bureaus.

A pre-approval is valuable when it comes to looking for a property. It indicates you are a serious buyer and means that you are ready to move quickly on a property when you find one you love.

2. Find a Property

Most people start looking for properties long before they are pre-approved for a mortgage, and perhaps before they are even thinking of buying a home. But if you’ve followed the steps above, and so have your pre-approval, you’re now ready to begin looking in earnest.

There are many ways of doing this. You can use online real estate portals like Zillow or Trulia, buy a house at auction, or even look for an off-market home. Just make sure you don’t fall into some of the common mistakes people make when house-hunting.

Making an offer

Once you’ve found a suitable property, you’ll need to put in an offer on it. Your real estate agent should help you to do this, as different sellers and properties require different sorts of offers.

At this stage, you’ll normally have to put down earnest money, a deposit that indicates you are seriously interested in a property. Typical earnest money deposits are 1% to 2% of the sale price. If you close on a property, this money is put towards the downpayment.

Normally, your offer will also contain contingencies that allow you to pull out of the deal. These are designed to protect you and your money if the house you’ve chosen is not quite what it seems. Common contingencies include:

  • Appraisals must come in close to the loan amount, not lower
  • Home inspections do not find major issues with the property
  • You are able to secure final mortgage approval

3. Apply for a Mortgage

At this stage, you are ready to apply for a final mortgage. To do this, you’ll need to approach a mortgage lender—most likely the one that gave you pre-approval, but you should also shop around to make sure you get the best deal.

Each mortgage lender will need information in order to give you an offer. They may have some of this information already but they may need to collect more. But you will also need to give your lender a pack of documents. Your real estate agent may be able to grab some of the harder-to-find items, such as property taxes.

Your lender should guide you as to what to send and when, but they are likely to need:

Employment
   • Name of current employer, phone, and street address
   • Length of time at current employer
   • Position/title
   • Salary including overtime, bonuses, or commissions

Income
   • Two years of W-2s
   • Profit and loss statement if self-employed
   • Pensions, Social Security
   • Public assistance
   • Child support
   • Alimony

Assets
   • Bank accounts (savings, checking, brokerage accounts)
   • Real property
   • Investments (stocks, bonds, retirement accounts)
   • Proceeds from the sale of your current home
   • Gifted funds from relatives (e.g. a down payment gift for an FHA loan)

Debts
   • Current mortgage
   • Liens
   • Alimony
   • Child support
   • Car loans
   • Credit cards
   • Real property

Property information
   • Street address
   • Expected sales price
   • Type of home (single-family residence, condo, etc.)
   • Size of property
   • Real estate taxes (annual)
   • Homeowner’s association dues (HOA)
   • Estimated closing date

Credit history
   • Bankruptcies
   • Collections
   • Foreclosures
   • Delinquencies

This last item—your credit history—is one of the most important elements in getting your mortgage approved. Because of this, it’s a good idea to check your credit report beforehand to see where you stand. You’re entitled by law to one free credit report from each of the three main reporting bureaus each year.Be prepared to explain any missteps in your financial background. It’s good to have dates, amounts, and causes for any of these parts of your history.

Check Your Credit Score

It’s a good idea to check your credit report beforehand to see where you stand. You’re entitled by law to one free credit report from each of the three main reporting bureaus each year.

4. Complete Loan Processing

The next step is for the lenders you’ve approached to pull together all the information you’ve provided into a loan estimate. A loan estimate is a three-page form that presents home loan information in an easy-to-read format, complete with explanations. This standardization not only makes the information easy to digest; it also makes it easy to compare offers among lenders to see which one is offering you the best deal.

You’ll get a loan estimate within three business days of applying for a mortgage unless you don’t meet the lender’s basic qualifications and your application is rejected. If that happens, the lender must give you a written notice within 30 days stating why your application was rejected. The only fee you may have to pay to get a loan estimate is a credit report fee.

When you receive a loan estimate, it’s valid for 10 business days. If you want to accept a loan offer, try to do it within that time frame; the lender may change the terms and issue a new loan estimate if you take more time to decide.

If you accept a loan estimate, your loan will start to be processed. At this stage, your mortgage lender will start to go through and verify the information you’ve provided to them. This includes:

  • Ordering a credit report (if not already done as part of your pre-approval)
  • Verifying employment (VOE) and bank deposits (VOD)
  • Order a property inspection and appraisal
  • Order a title search

5. Go Through Underwriting Process

The next stage is for your application to be assessed by underwriters.

Though you are unlikely to deal with them directly, mortgage underwriters are actually the key decision-makers in the mortgage approval process and are the people who will give final approval for your mortgage.

Underwriters will check every aspect of your mortgage application and carry out a number of other steps. For instance, borrowers are required to have an appraisal conducted on any property they take out a mortgage against. The underwriter orders this appraisal and uses it to determine if the funds from the sale of the property are enough to cover the amount you will be lent in your mortgage.

Once underwriters have assessed your application, they will give you their decision. This will either be to accept the loan as it is proposed, reject it, or approve it with conditions. Your mortgage might be approved, for instance, on the condition that you supply more information about your credit history.

If your application is approved, you will then lock in your interest rate with your lender. This is the final interest rate you will pay for the remainder of your mortgage term.

Closing Costs

Closing costs typically range from 2% to 5% of the home’s purchase price.

6. Close on the Property

If your mortgage application is approved, it’s now time for closing. At this stage, a large stack of documents will be printed out and you’ll be invited to the title company (or attorney’s office) for a closing meeting.

One of the most important documents you’ll see at this meeting is your closing disclosure form. On this form, you’ll see a column showing the original estimated closing costs and final closing costs, along with another column indicating the difference if costs rose.

Closing costs typically range from 2% to 5% of the home’s purchase price. Thus, if you buy a $200,000 house, your closing costs could range from $4,000 to $10,000. Closing fees vary depending on your state, loan type, and mortgage lender, so it’s important to pay close attention to these fees.

If you see new fees that were not on the original loan estimate or notice that your closing costs are significantly higher, immediately seek clarification with your lender and/or real estate agent.

If everything looks to be in order, you will sign to accept the mortgage and you will leave the office with the keys to your new home. Well done!

Three-day review period and final walk-through

At this point, a countdown begins. If no further action is taken, your mortgage will become active in three days’ time. However, at this stage, you have the right to spend three days reviewing your documents to make sure everything is in order.

You should compare your closing disclosure to the loan estimate you received in stage 4 above. Small changes, discrepancies, or typos are allowed, but if you see anything you don’t understand, you should seek clarification immediately.

In addition, there are certain changes that can cause your mortgage agreement to be put on hold. This will happen if:

  • The APR on the loan changes by more than one-eighth of a percent (most fixed loans) or one-quarter of a percent (most adjustable rate loans).
  • A prepayment penalty is added to the mortgage.
  • There’s a change of loan products (for example, a change from a fixed-rate loan to an adjustable-rate loan).

Assuming everything is in order, your mortgage will automatically go live after the three days are up.

Typically, mortgage contracts give you the right to a final walk-through of the property at least 24 hours before your closing. You can use this visit to check that the previous tenant has vacated the property and that they have carried out any repairs that were required.

Who Approves a Mortgage?

Though you will normally deal with a mortgage lender such as a bank, the final decision as to approval for your mortgage rests with underwriters.

How Long Does It Take To Close On a House?

Typically it takes 30 to 45 days to close on a house, depending on a few factors like how fast it takes to get a home inspection and whether or not you are pre-approved for a mortgage.

How Much Are Closing Costs When You Buy a House?

There are many fees associated with closing costs, from appraisal fees to the fees you pay the lawyer who draws up your contract. These costs can add as much as 2% to 5% of the home’s purchase price and are typically due at the closing.

The Bottom Line

The process of applying for a mortgage can be complicated, but there are a number of distinct steps involved. Most people will go through these six steps: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing.

The process can be long and stressful, but make sure you don’t rush it. Check all of your documents carefully, make sure you understand the mortgage you are being sold, and seek expert help if you are unsure about anything. You’ll be paying your mortgage for a long time, so it makes sense to get it right.



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