Step #1: Pre-Qualification
The pre-approval process begins when a consumer submits the requested paperwork for review. We will take the paperwork provided and begin the process of determining which loan programs are available, which loan program would be the best fit for the consumer and we will generally underwrite the file to make sure we don't encounter unnecessary problems after the consumer has found a home. Variables such as a consumer's credit history, their current credit score, their income, expenses and intended use for the home will all factor into the underwriting process.
Step #2: Pre-Approval
Once we have analyzed all of a consumer's paperwork and determined what can be done, a conversation must occur about what a consumer wants to do. A consumer may be able to afford a much larger loan than they want or it can be the case that the consumer may not qualify for a loan the size they need to purchase the size and style of house they would like. Once we know what is possible then we collaborate on exactly what our client wants.
At that point we will contact the consumer's realtor and explain the details that we have agreed upon with our client and explain how the purchase contract should be written as it pertains to the impending loan.
Step #3: The Application and Disclosures
The application is the next step of the loan process. In order to move the process along we will sign the application and disclosures and submit them to the underwriter so that we can be one step ahead when the consumer finds their home. The initial disclosures are generally emailed and docuSigned in todays high tech mortgage market but paper copies can also be generated and signed if a client prefers that method.
Step #4: Underwriting
Once our processors have put together a complete package with all verifications and documentation, the file is sent to an underwriter. An underwriter is responsible for determining whether all of the details of the loan submission meets the minimum guidelines as set forth by whatever agency has set the guidelines for the loan type applied. Fannie Mae & Freddie Mac, the two government sponsored entities that oversee conventional loan markets set the underwriting guidelines for conventional loans. The federal government's Department of Housing and Urban Development sets the underwriting guidelines for FHA loan. The federal government's Department of Veteran Affairs sets the guidelines for VA loans and so on with all loan types.
Current income, past income and the likelihood of continuing income is considered. Income sources are verified to determine if they meet approved sources. Assets are verified for down payments and financial reserves. The sources of the funds are verified to determine if they came from sources accepted by the underwriting guidelines. Individual deposits are verified or "sourced." Past credit history is analyzed to determine the risk that is being taken in lending the money. Consumers with a history of not paying their monthly bills on-time or who have collections for unpaid financial obligations are considered by the underwriter to determine the risk factor. Credit reports are analyzed to determine how much credit a consumer has available vs. how much credit that consumer is using to determine the debt load the consumer is carrying and how that is likely to effect their ability to pay. These and literally hundreds of other details are verified to see if they meet the underwriting guidelines.
To help a consumer understand the size and scope of the underwriting process we like to inform our clients that the underwriting manual for an FHA loan alone is 1,009 pages long and there are similar manuals for conventional loans, VA loans, USDA loans as well as sub-prime non-agency loans and other less common loan types. Additionally, if that was not enough, the guidelines change every quarter.
Step #5: The Appraisal
An appraisal is an estimate of value made by a professional appraiser. The appraiser's job is to impartially determine the value of a house and deliver a written report detailing why he / she believes the value is what they have determined and why. An appraiser must use one of the three following approaches:
The method of ordering appraisals is mandated by the federal government. In response to what had been determined to be significant appraisal fraud perpetrated on the housing markets in the years following the economic collapse in 2008, the federal government put restrictions on how appraisals must be ordered. Gone are the days when a loan originator could call up his trusted professional appraiser and request an appraisal directly. Now appraisals must be ordered through an independent third-party appraisal management company who will randomly assign the appraisal to one of the licensed appraisers contracted to do appraisals for the company.
Realtors, Loan Originators and even home owners are barred from speaking directly to the appraiser except for the homeowner who must allow the appraiser to gain access to the subject property for the appraisal inspection and only then. We no longer have access to ask the appraiser when they are going to finish or how much the appraisal will cost. We may not even know who performs the appraisal because some investors black out the name before providing our copy. The system is clearly a flawed system but it is the system we are required to work in.
Appraisals generally cost between $425 -$550 dollars and generally take 7-10 days to complete.
Step # 6: Conditional Approval
Once the underwriter has reviewed the application and documents submitted they will either decline the file or issue a conditional approval. A conditional approval is exactly what it sounds like, an approval based on the documents provided with additional conditions that if met will result in a successful loan transaction. The conditions on the approval will be additionally requested documents, clarification of previously submitted information and other tasks that must be accomplished prior to the underwriter issuing a final approval.
Step #7 Final Submission
Once the Loan Originator has gathered all of the conditions on the conditional approval and all of the tasks required by the underwriter have been accomplished, the conditions are submitted along with the appraisal which will have generally been completed after the pre-approval was issued and we wait for the underwriter to go over all of the documents, appraisal and verifications so he / she can issue their final approval.
Step # 8 Quality Control Review
After the underwriter have issued their final approval the file is submitted to the quality control department where the file is double checked for underwriter errors (remember, the FHA manual is over a thousand pages long by itself) before the loan is sent to the doc-drawing department. At this point the federally required Closing Disclosure is sent out if it has not been already and the doc-drawing department prepares the final loan documents for signature.
Step # 9 Loan Signing
Once the loan docs are released to the escrow company handling the transaction, the escrow company begins gathering the final escrow and title documents that will need to be signed with the loan documents. An appointment will be scheduled with a notary and the loan documents will be signed and returned to the lender for review.
Step # 10 Closing
After the documents have been signed and returned representatives from both the title company and the lender's funding department begin the process of double-checking all of the funding details. The funder will make sure that the escrow company has properly filled out all fo the federally required closing documents and the escrow and title representatives will make sure that the funder has all of the items they need to fund the loan. Once all of the "i's" are dotted and the "t's" are crossed, the funder will fund the loan by wiring money from our account to the escrow company.
Once the funds have been received, the escrow company will release the file for recording which generally takes place the following day. Once the new deed has been recorded by the county recorder's office, legal title will have officially changed hands and the loan will be completed.