The Mortgage Loan Process Explained

Understand the mortgage loan process to make an informed buying decision. You will go through six steps: pre-approval, house shopping, mortgage application, loan processing, underwriting and closing. In the mortgage underwriting stage, lenders verify your financial documents and search for red flags. They’ll also order a property appraisal.

Pre-Approval

Mortgage pre-approval is like a physical exam for your financial health. Your lender pokes and prods all corners of your finances, asking for pay stubs, W-2 statements, tax returns, and more. Lenders also make a hard credit inquiry that can temporarily lower your credit scores. A pre-approval letter usually specifies a maximum loan amount and an interest rate.

Although you do not need to use the entire sum, doing so helps buyers narrow down their search and offers sellers assurance that you are a serious buyer. Mortgage lenders consider 4 Cs when approving borrowers: credit, capacity, capital and collateral. Getting pre-approved with the help of a mortgage broker Denver allows you to shop for the best possible mortgage, saving thousands of dollars in interest and fees. Lenders typically check to ensure you have enough income to cover your debt payments and the cost of a down payment and closing costs. They also want to see that your assets and debts don’t exceed a certain ratio.

Pre-Qualification

Pre-qualification is a conversation with a loan officer that helps you understand what kind of mortgage you can afford. It involves talking about your income, credit review and down payment funds. You may also need to provide documentation such as pay stubs, earnings and leave statements (if military), profit and loss statements if self-employed, bank statements and federal tax returns.

The lender may ask to pull your credit to confirm the information but only guarantees approval. If you are serious about buying a home, you can move on to the next step and apply for a mortgage. Getting pre-approved can help you plan for other expenses and make offers quickly once you find the right house. It will also let the seller know you are a serious buyer. However, it is important to remember that mortgage pre-approval expires, and any material change in your financial position may impact final loan approval.

Underwriting

Once your application has been submitted and your mortgage loan officer has obtained all required documentation, it will be sent to an underwriter for evaluation. In this phase, the underwriter will verify your income and assets. They will look at your credit reports and score from all three agencies to see how you’ve handled paying debt in the past.

They’ll also review your employment history and other documents about your income. During this stage, being honest with your underwriter is important. For example, if you have a missed payment, it’s ok to explain why so that the underwriter can understand your situation and be more lenient. Lastly, the underwriter will review your assets to ensure that you have enough equity in your home to cover the loan if you were to default on it.

Closing

During closing (or settlement), you’ll sign loan documents and make a cash contribution to cover your down payment and closing costs, as well as the escrow items for homeowners insurance, property taxes and prepaid interest. It is important to carefully review these documents and understand your responsibilities regarding your mortgage loan.

Before closing, you’ll have the opportunity to review the Closing Disclosure, which contains the finalized terms of your loan and includes the final interest rate and estimated monthly payments. It is your last chance to catch any discrepancies or miscalculations before closing. Your lender will conduct an appraisal to guarantee that the house you’re buying is worth the asking price. An unfavorable appraisal could ensure your loan process is completed on time.