First-time home buyers tend to find the mortgage approval process confusing. So we’ve created this guide to walk you through the different steps in that 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.
Understanding the Path to Mortgage Approval
We find that people have an easier time understanding the mortgage process when it’s explained as a series of steps. So let’s talk about the six major stages that occur along the way.
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 process, before you start shopping for a home.
Pre-approval is when a lender reviews your financial situation (including 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 confirming this amount. The lender might also check your credit reports and scores at this stage.
Pre-approval allows you to narrow your home search to a specific price range. If you were to skip it and go straight into the house-hunting process, you might waste time looking at homes that are above your price range (without realizing it).
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. This stage is often referred to as house hunting.
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 to complete the loan application.
Most lenders use the same standardized form, which is called the Uniform Residential Loan Application (URLA). It’s 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.
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).
Commonly requested documents include bank statements, tax returns, IRS W-2 forms, employment letters, the purchase agreement, and more.
The loan processor may perform the following steps:
- order credit reports (if this hasn’t been done already),
- begin verifying income, assets, employment, and…
- order a home appraisal to determine the value of the property.
Just know that these procedures 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.
Step 5: Mortgage Underwriting
Mortgage underwriting is a process lenders use to assess a borrower’s financial risk, before approving them for a home loan. It involves evaluating the applicant’s creditworthiness, income, assets, debts, and the property’s value to determine whether they qualify.
The underwriter is the key decision-maker during this process. This individual (or team) has the 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.
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, they 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.
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, they will label it “clear to close.” This means all requirements have been met, and the loan can be funded.
Next, all of the supporting documentation (or “loan docs”) will be sent to the title company that was 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 all happens at the “closing” or settlement, which might take one day or several.
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 journey to homeownership.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst and reporter. He has been covering the U.S. real estate market for nearly 20 years. More about the author