First-time home buyers tend to find the mortgage approval process confusing. We know, because we get their questions via email on a regular basis! So we’ve created this guide to walk you through the different steps in a typical mortgage approval process.
Note: The lending process can vary from one borrower to the next, due to a variety of factors. So your experience might be slightly different from the one outlined below. These are the six steps that usually take place before a home loan is approved by a lender.
The 6 Steps in the Mortgage Approval Process, Explained
We find that people have an easier time understanding the mortgage loan approval process when it’s explained as a series of steps. So let’s talk about the six major stages that occur along the way (as shown in the image above).
Step 1: Mortgage Pre-Approval
You can think of pre-approval as a kind of financial pre-screening. It has “pre” in the name because it happens on the front end of the mortgage loan approval process, before you start shopping for a home.
Pre-approval is when a lender reviews your financial situation (particularly your income, assets and debts) to determine if you’re a good candidate for a loan. They’ll also tell you how much they are willing to lend to you, and provide you with a pre-approval letter to that effect. The lender might also check your credit reports and scores at this stage.
This a beneficial step in the mortgage approval process, because it allows you to narrow your home search. If you were to skip the pre-approval and go straight into the house-hunting process, you might end up wasting time by looking at homes that are above your price range.
Step 2: House Hunting and Purchase Agreement
Once you’ve been pre-approved for a certain amount, you can shop more confidently within that price range. And that brings you to the second major step in the mortgage approval process — house hunting.
We’ve written extensively about the house hunting process. Here are some house hunting tips geared toward first-time home buyers in particular.
Your mortgage lender isn’t heavily involved at this stage. The house hunting work is primarily done by the buyers and their real estate agents.
But the lender does come back into the picture once you’ve made an offer to buy a home. That’s when you move into the next step of the mortgage approval process — filling out an application.
Step 3: Mortgage Loan Application
You’ve been pre-approved for a loan. You’ve found a home that meets your needs, and you’ve made an offer to buy it. The seller has accepted your offer. Now it’s time for the next stage of the mortgage approval process, and that’s the loan application.
This is a straightforward step in the process, because most lenders use the same standardized form. They use the Uniform Residential Loan Application (URLA), also known as Fannie Mae form 1003. The application asks for information about the property being purchased, the type of loan being used, as well as information about you, the borrower.
You can find a sample loan application online: just do a Google search for “Fannie Mae form 1003.”
Step 4: Mortgage Processing
Once you have a purchase agreement and a completed loan application, your file will move into the processing stage. This is another important step in the broader mortgage loan approval process.
Loan processors collect a variety of documents relating to you, the borrower, as well as the property being purchased. They will review the file to ensure it contains all of the documents needed for the underwriting process (step 5 below). These documents include bank statements, tax records, employment letters, the purchase agreement, and more.
The loan processor may also:
- order credit reports (if this hasn’t been done already),
- begin verifying income, assets and employment, and
- order a home appraisal to determine the value of the property.
The exact steps performed by the loan processor can vary slightly from one company to the next. It also varies based on the type of mortgage loan being used. But this is usually how it works. After this, you’ll move into one of the most critical steps during the mortgage approval process — underwriting.
Step 5: Mortgage Underwriting
Underwriting is where the “rubber meets the road,” when it comes to loan approval. It is the underwriter’s job to closely examine all of the loan documentation prepared by the loan processor, to make sure it complies with lending requirements and guidelines.
The underwriter is the key decision-maker during the mortgage approval process. This individual (or team of individuals) has authority to reject the loan if it doesn’t meet certain pre-established criteria. The underwriter will double-check to ensure both the property and the borrower match the eligibility requirements for the specific mortgage product or program being used.
The underwriter’s primary responsibility is to evaluate the level of risk associated with your loan. He or she will review your credit history, your debt-to-income ratio, your assets, and other elements of your financial picture to predict your ability to make your mortgage payments.
Mortgage underwriters focus on the “three C’s” of underwriting — capacity, credit and collateral:
- Capacity — Do you have the financial resources and means to repay your debts, including the mortgage loan? To answer this question, they’ll look at your income history and your total debts.
- Credit — Do you have a good history of repaying your debts, as evidenced by your credit reports and scores?
- Collateral — Does the property serve as sufficient collateral for the loan, based on its current market value? The underwriter will use the home appraisal report to determine this.
If the underwriter encounters issues during this review process, he or she might give the borrower a list of conditions that need to be resolved. This is known as a conditional approval. A common example of a “condition” is when an underwriter asks for a letter of explanation relating to a particular bank deposit or withdrawal.
If the issues discovered are minor in nature, and the borrower(s) can resolve them in a timely manner, then the mortgage loan can move forward and eventually result in approval. However, if the underwriter discovers a serious issue that is outside the eligibility parameters for the loan, it might be rejected outright. Some borrowers sail through the underwriting process with no issues whatsoever. It varies.
Underwriting is arguably the most important step in the mortgage approval process, because it determines whether or not the loan is ultimately approved. You can learn more about the process here.
Step 6: Mortgage Loan Approval and Closing
If the mortgage underwriter is satisfied that the borrower and the property being purchased meet all guidelines and requirements, he will label it “clear to close.” This means all requirements have been met, and the loan can be funded. Technically speaking, this is the final step in the mortgage approval process, though there is one more step before the deal is done — and that’s closing.
Prior to closing, all of the supporting documentation (or “loan docs,” as they are called) are sent to the title company that has been chosen to handle the closing. And there are a lot of documents. The home buyers and sellers must then review and sign all of the pertinent documents, so the funds can be disbursed. This happens at the “closing” or settlement.
In some states, the buyer and seller can close separately by setting up individual appointments with the title or escrow company. In other states, the buyers and sellers sit at the same table to sign documents. The procedure can vary depending on where you live. You can ask your real estate agent or loan officer how it works in your area.
Prior to closing, borrowers should receive a Closing Disclosure. This is a standardized five-page form that gives you finalized details about the mortgage loan. It includes the loan terms, your projected monthly payments, and the amount you will need to pay in fees and other closing costs.
We hope you’ve found this guide to the mortgage approval process helpful, and wish you all the best in your home-buying quest.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author