What Are the Steps in the Mortgage Loan Approval Process?
Typically, homebuyers reach out to lenders before they begin shopping to see what they can afford. Lenders—which are typically banks and credit unions—can help answer any questions homebuyers may have and guide them on what type of loan may make the most sense for their needs.
Many times, the next steps are a prequalification or preapproval process. In connection with a prequalification or preapproval request, some lenders may issue a written commitment letter to extend a loan up to a specified amount, subject to limited conditions. These letters specify how much a lender is willing to give to a borrower. They provide useful information about the likelihood of getting a loan, giving homebuyers a better idea of what properties will align with their budget.
There are several steps a mortgage approval can move through in the process:
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Prequalified: A surface level evaluation of finances that includes a soft or hard credit pull and an estimate of what someone can afford is done. While a lender believes a borrower is eligible for the requested loan amount, they have not yet verified their financial situation.
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Preapproved: The lender conducts a more thorough review of a borrower’s information such as credit history, employment status, income and asset information, as well as other data that may approve them for a certain type of loan and amount of money. This type of approval requires document verification such as pay stubs, tax returns, asset statements and more.
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Conditionally Approved: This means an underwriter has verified and approved most of a borrower’s application but will request more information for final approval. This step is likely complete once the borrower has entered into a fully executed purchase contract on a specific property.
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Clear to Close: A borrower has met all requirements to close on their mortgage and been fully approved for financing. At this point the home purchase is almost complete.
How to Prepare to Apply for a Mortgage
Applying for a real estate mortgage loan is a major step in the home buying process. Lenders require detailed information from the borrower, which they will forward to a mortgage loan officer for further review. Your documentation will then be reviewed by an underwriter for decisioning. To ensure a smooth application process, borrowers should be ready to provide a variety of documents, including but not limited to:
- Employment: This includes information about a borrower’s employer, their time at that company, and their position or title.
- Income: Lenders need to verify a steady source of income and the ability to repay the loan. They will likely require your most recent paystubs, W2s, award letters for retirement or disability income, and possibly tax returns, when applicable.
- Assets: A borrower needs to have sufficient assets for the down payment and closing costs. This may include the two most recent statements for any asset being used.
- Debt: Current mortgages should be included in an application. Also, borrowers need to include their recurring debt, including credit card debt, student loan debt and auto loans. Other fixed obligations such as alimony and child support should also be disclosed.
- Property Information: Lenders will need information on the property a borrower plans to purchase, including the address, purchase price, property type and the estimated closing date.
- Credit History: Understanding your credit history is an important part of the mortgage application process. A mortgage lender will pull your credit when you apply for a mortgage to get an in-depth look at your credit history, like your credit score, credit accounts and recent credit inquiries. Lenders will do a “soft pull” of your credit for pre-approval, which does not impact your credit score, and a “hard pull” of your credit during the underwriting process. Your credit score may take a slight dip after the hard pull but will rebound.
A borrower should then receive a loan estimate within three business days. This document must be provided by lenders to mortgage loan applicants. It gives a clear outline of the proposed loan terms to help applicants decide if the loan is right for them. Some key details will include estimated interest rate, monthly payment, total closing costs, and more. It’s important to remember that a loan estimate doesn’t mean the lender has approved or denied the loan. The applicant is also not committed to the lender or the loan terms until they sign the final documents.
What is Underwriting and Its Role in the Mortgage Process?
Underwriting is a crucial step in the loan application process. The lender evaluates the risk of lending money to an application and determines whether someone qualifies for a loan and if they are willing to approve it.
During this phase, the underwriter reviews the information provided in an application, including income, assets, debts, credit history, and property details. They assess the ability to repay the loan and whether the property is worth the amount someone is borrowing against it.
The underwriter’s role is to ensure the loan meets all the lender’s guidelines and any regulatory requirements. They may request additional information or documentation if something isn’t clear. Once the underwriter is satisfied that all conditions are met, they will approve the loan, allowing the process to move toward closing.
Underwriting has two key steps: initial conditional approval and final clear to close. First, the underwriter checks the documents and issues a conditional approval if someone meets the basic requirements, pending any additional conditions. Once they meet those conditions, the mortgage loan applicant will receive the final clear to close. This means the loan is fully approved and is ready for closing.
Final Steps: Clear to Close
Lenders will start to prepare for the closing once a borrower receives final approval, also known as clear to close. This will include a closing disclosure (CD) that outlines the final costs for the borrower and seller. This document should be reviewed carefully for accuracy: it will include the mortgage rate, loan type and closing costs.
The lender will also schedule a closing date and time with the title company, real estate attorneys, and agents prior to the CD being signed. Once the closing date has taken place, the funds are disbursed by the lender and the property ownership is transferred from the seller to the buyer.
Credit Union 1 offers tools to help make the home-buying process easier, like a Mortgage Calculator and a simple online application, where you can get a quick pre-approval and get on your way to owning your next home. Start a mortgage application today.