• Making the Mortgage Process a Little Less Confusing

    In February 2011, the Wall Street Journal wrote about a consumer survey that related to the home-buying process. The survey asked people what was the hardest part of buying a home. A good portion of the respondents said that understanding the mortgage process was a major problem. In fact, confusion over the loan process was one of the top-three complaints among the respondents.

    That's where we come in. Our mission is to give consumers the information they need to make smarter decisions when buying a house. And this applies to home loans as well. On this page, you'll find an explanation of the steps involved in the mortgage process. You'll also find some links to related articles with additional information.

    Basic Steps in the Mortgage Loan Process

    The rest of this article (and website) will make a lot more sense, once you understand the process that takes place when applying for a mortgage. Just keep in mind that these steps may vary slightly from one borrower to the next.

    Here are the six major steps to getting a loan:

    1. Financial self-assessment and preparation
    2. Pre-approval / applying for a loan
    3. Mortgage origination and processing
    4. The underwriting process
    5. Satisfying loan conditions
    6. The closing process

    Let's take a closer look at the six steps to mortgage approval...

    Step 1 - Financial Self-Assessment and Preparation

    This stage of the mortgage process can be summed up with four words -- budget, credit, savings and documents. You need to establish a monthly housing budget based on your current income and debt situation. You need to check your credit score, since the lender will use it during the approval process. You need to save as much money as possible to cover your down payment, closing costs and (possibly) cash-reserve requirements. And lastly, you should start rounding up the financial documents you'll need during the mortgage application process.

    Here is some more information about these four tasks:

    • You must establish a budget for yourself before you apply for a loan. The lender will give you an approval amount for the loan (assuming you get approved). But that number is based on their assessment. You need to do your own assessment to determine what you can comfortably afford to pay each month. Here's how
    • You should check your credit score to see where you stand, in terms of qualifying criteria. These days, your FICO credit score has the power to make or break the loan. The lender will also use it when setting your interest rate. So it's important to you for two reasons. Learn more
    • You should be saving as much money as possible, to cover all of your housing-related expenses. You'll have to put at least 3.5 percent down on the mortgage, unless you use the VA or USDA loan program. Your closing costs can add up to thousands of dollars more. On top of these things, some lenders will require you to have additional cash reserves in the bank, to satisfy their underwriting requirements. This should be one of your first steps in the mortgage process. The more money you can put aside, the better.
    • When you apply for a home loan (next step), you'll have to provide a variety of financial documents. You might have to jump through some additional paperwork hoops later on, during the underwriting process. You can make things easier on yourself by gathering these documents now. Here's a partial list

    This stage includes some of the most important steps in the mortgage process, so you shouldn't skip it. Many first-time home buyers jump into the process with step #2 below. But this is a mistake. Before you start dealing with mortgage lenders, you should already have a budget on paper. You should also know your credit score.

    Step 2 - Applying for the Loan (Pre-Approval)

    I recommend applying for a mortgage loan through the pre-approval process. This means you are submitting an application before you've actually found a house. The goal here is to find out how much the lender is willing to give you, before you start the house hunting process.

    During pre-approval, the lender will look at your income, credit and debt situation. Based on this initial assessment, they will tell you how much of loan they're willing to give you. Now you can see why it makes sense to do this before you start shopping for a house.

    You can learn more about pre-approval in this article.

    The application itself is one of the more straightforward parts of the mortgage process. You will probably have to complete the Uniform Residential Loan Application (Fannie Mae form 1003 / Freddie Mac form 65). You can view or download a blank form with a quick Google search. You shouldn't actually fill out this form unless your lender asks you to, since they might have a different version. But it's still a good idea to download a blank application, so you can see the kind of information it requires.

    Learn more about the different parts of a mortgage application.

    Step 3 - Mortgage Origination and Processing

    Origination is just a big word for creation. It's lender jargon. The lender "originates" the loan by combining your application with the other documents we talked about earlier. They might even ask you for additional documents at this stage of the mortgage process.

    In most cases, the loan processing starts after you have found a home and made an offer to buy it. You would then go back to your lender with the signed purchase agreement. This document shows them how much you're offering for the home. Later, they will have the home appraised to make sure it's worth the amount you are trying to pay.

    There's really not much for you to do during this step of the process. Just stay in touch with your point of contact at the mortgage company. Provide any documents they request. Keep the lines of communication open.

    Step 4 - The Underwriting Process

    Underwriting is the next stage of the mortgage process. This is when the lender passes your application file along to an underwriter. It's this person's job to determine if you, as a borrower, represent an acceptable level of risk for the lender.

    Mortgage companies are willing to take on a certain amount of risk when making loans. It's the nature of the business. But they have parameters that limit the amount of risk they are willing to accept. The underwriter will "measure" you against these parameters. They primarily do this by looking at your credit score, your income level, your debts, and the amount of money you are putting down. Mortgage approval lies within these four factors, more than anything else.

    During the underwriting stage, you will probably be asked to provide additional documents. For instance, if you have moved money out of your savings account recently, the underwriter might ask for a written explanation of this. He or she may establish other conditions for loan approval, as well. So that's the next part of the mortgage process we need to discuss...

    Step 5 - Conditions to Approval

    Your loan application will be put through an Automated Underwriting System (AUS). The computer will then create a list of items that are needed to satisfy the lender's requirements. This might also be done by a human underwriter, as we discussed earlier. But whether it's done by man or machine, the end result is the same.

    This step of the mortgage process is basically a task list for the borrower. You will be presented with a list of "conditions to approval." These are things you must do, or documents you must provide, in order for the loan to be approved. 

    The last time I applied for a home loan, the lender gave me a list of five conditions that had to be met. The most significant item was paying off a credit card. They said my debt-to-income ratio was a little too high for the underwriter, so I had to pay off a $12,000 credit card balance. You can imagine my surprise. This is an extreme example of a mortgage condition. They also wanted me to provide a profit-and-loss statement, since I was self-employed at the time (a standard requirement).

    Here are some common conditions for approval:

    • Additional documents to prove your income
    • Proof of your homeowners insurance
    • Property appraisal to determine the value of the house
    • Cash reserves in the bank to cover your first few payments

    Different borrowers will have different "hoops" to jump through. It varies from lender to lender, because they all have their own underwriting standards and requirements. These conditions will be presented to you in writing, after the initial underwriting process.

    Step 6 - The Closing

    We've published an in-depth guide that explains what happens on closing day. So I won't repeat it all here. Here's the short version instead:

    Closing is the final step in the mortgage process. It's also referred to as settlement, particularly in the eastern part of the U.S. This is when all of the funds are distributed to the receiving parties, and all of the paperwork is finalized and signed.

    The sellers will receive whatever proceeds they earned from the sale. The buyers will present a cashier's check to cover their closing costs. The deed (and the house keys) will be transferred from the seller to the buyer. Most of this will be managed by an escrow company.

    This article explains the process of getting a mortgage loan. You'll find dozens of related articles on this website. You can use the search tool located at the top of this page to continue your research. You might want to go back through this article and follow some of the hyperlinks I've provided, too.