How to Successfully Navigate the Mortgage Process

 

Gather your documents, there’s a lot involved in the mortgage process and what you need to know to get your home loan approved. The home loan process is only part of the equation though. It’s important to take understand all the steps before the jumping into the mortgage process.

Before Beginning the Mortgage Process

Before heading into the mortgage process, taking certain steps will help increase your chances of getting your home loan fully approved.

• Pay your bills on time gives you a good credit history. Late payments on your credit reports can negatively affect your credit score, which can play a significant role in whether you get approved for financing or not. Learn more about how your credit score can affect the rate and conditions you receive on a home loan.

• Be mindful of changing jobs when you’re preparing to purchase a home. Lenders want to see stability and continuity in your employment history. Lenders will look at your employment history to make sure you have enough—and will likely continue to have—income to repay the loan. Be prepared for the lender to ask for more documentation to prove that your work history and income will be sufficient for you to handle a home loan.

• Research the best home loan solution for your needs. Take time to educate yourself on the ins and outs of fixed rate, adjustable rate, and FHA and VA home loans. It is also a good idea to learn about all the fees that may be involved with each home loan type and what kind of credit is needed for each.

• Determine what you can afford. Find out what the current average mortgage rates are. Also keep in mind that you’ll need to pay for homeowner’s insurance and local property taxes in addition to your monthly mortgage payment.

Understand Your Current Credit Standing

When applying for a home loan, most lenders will look at your FICO Scores. Scores help lenders determine your credit risk and are used to determine the interest rate charge on the home loan.

You have three FICO scores; one from each of the three major credit bureaus— Equifax, Experian, and Transunion. The scores offered by these credit reporting agencies is based on the information found on your credit report and is during your home loan process.

Changes to your credit reports and credit scores 

Remember, changes to your credit reports and credit scores can derail the home loan process at any time. The lender may check your credit score just hours before your loan is finalized. It’s wise to stay on top of your credit. You can check your Experian score for free on credit.ly. You might also consider a service to monitor all three of your credit reports bureau to catch any major changes as quickly as possible.

If you need to improve your credit score before applying for a home loan, aim to:

• Keep your credit balances low – under  30%
• Set up payment reminders, to avoid the risk of late payments
• Reduce your debt as much as you can by paying off accounts
• Dispute any errors you find on your credit report

To learn about more ways to improve your score, see “11 Ways to Improve Your Credit Score.”

Preapproval and the Home Loan Process

Once you’ve ensured your credit is ready to start the home loan process, you’ll begin by working with a loan officer at a bank.  Or work with a mortgage provider to get pre-approved for a mortgage. Your loan officer will help you understand the required documents you need during the mortgage process. Your loan officer will help you complete a mortgage prequalification application and then submit the application along with the required documents, to an underwriter.

The underwriter will come back with one of four decisions about your application:

• Approved
• Approved with conditions
• Suspended, which means more documentation is required before the underwriter can make a decision
• Denied

In many cases, a mortgage pre-approval application comes back as “approved with conditions.”

To turn an “approved with conditions” decision into a fully approved loan is to meet (or eliminate) those conditions, whatever they are. Your loan officer should help you navigate this process.

Lock In Your Rate and Terms

Once you are approved for your loan, it’s important to lock in an interest rate. And lock in loan terms. Such as how long the long will it last. And whether the interest rate is fixed or adjustable with your lender. Locking in commits your lender to funding your loan at the specified rate. It takes the risk of changing interest rates, which can happen daily, out of the picture.

You want to get your loan terms in writing. It’s also important to remember that the lender will likely give you a time limit on how long these terms and conditions are valid. This means you have to finalize your loan before they terms expire.

Once you’ve locked in your rate and terms, congratulations! You’re cleared to make an offer on a house with the confidence that you will be able to close on your new home.

Stop though. The hard work isn’t quite over yet. It’s still up to you to do everything you can in order to ensure your closing goes smoothly.

Close the Deal: Satisfy the Underwriter’s Conditions

When your application is approved, it’s important to check the underwriter’s checklist of borrower conditions. The list will specify everything you need to do in order to ensure your loan will get approved for closing.

The conditions often include requests for alternative and supplementary documentation. They also include explanation and/or correction of anomalies. And verification and attestations (find more below).

The Importance of Borrower Conditions and Locking In

The borrower conditions of a loan include the interest rate. And the amount of the principal. Thirdly, the lender’s desire to actually finance the borrower. And lastly other conditions on how you (the borrower) intend to use the loan.

Borrower Conditions

Each phase of the mortgage process involves steps you and your the loan officer have to execute carefully in order to ensure that you get the best loan available. And in order to ensure that the purchase comes to a smooth and efficient close. Consider the following example of what can go wrong.

Potential homeowner, Elizabeth, received loan approval. The lender sent loan documents to the closing agent. Elizabeth signed the document and put her down payment into escrow. (This is an account used after you move into your home and that your lender uses to pay your property taxes and homeowners insurance for you.) She expected the loan to fund, but the lender refused to fund the loan, stating that she had not satisfied certain conditions.

Elizabeth had missed the lender’s specific closing instructions, a sheet that tells the closing agent what they must do to complete the transaction. Most of these items don’t require attention, but a loan officer’s foremost job at this point is to ensure that someone takes care of any items that need attention.

In this instance, the closing agent didn’t bring the instructions to the attention of the borrower. This was at the time documents were signed. And it sounded as if the loan officer stopped doing his/her job.

The moral of story: Ensure you ask your loan office if everything is taken care of.

Lock In Your Interest Rate and Loan Terms

Locking in your interest rate and loan terms sets your mortgage approval application in stone. Locking in protects you against increases or other changes while your application is processed. A locked-in rate can also prevent you from taking advantage of rate decreases during this period. Learn more about when to lock in your rate.

How to Satisfy Borrower Conditions

When a lender issues an approval letter, there are almost always some conditions, which can include the following.

Alternative and Supplementary Documentation:

 

• If you lack a credit history or score, service accounts—such as utilities, cable, or telephone—may provide acceptable alternatives
• If you’re self-employed or have rental or other unconventional income, you may need profit and loss statements prepared by a licensed Certified Public Accountant (CPA)
• You must supply updated account statements immediately prior to closing

 

Explanation and Correction of Anomalies:

 

• You must explain or correct inconsistencies in credit reports
• You may be asked to get an official explanation of wages, tax statements, pay stubs, etc. from your employers’ payroll departments or other authorities

 

Verification and Attestations

You may be asked for verification of the following:

• Employment and income
• Housing or rental history
• Gift funds (by means of a sworn letter from the donor foregoing repayment)

To get ahead of addressing conditions, consider getting pre-approved by a reliable lender before starting the mortgage process. This can help identify potential conditions earlier in the process. Make certain you see the approval sheet when your lender tells you the loan has been approved. And work with your loan officer to assure that you’re complying with all requirements and any conditions.

Later, when you sign your mortgage loan documents, get a copy of the list of all remaining conditions from the closing agent and make sure someone is handling the items listed. It’s important to leave plenty of time for items to be corrected on your credit reports. And for any legal issues to be documented and settled by the relevant authorities, if necessary. Because reports are typically pulled and reviewed again just prior to closing.

If you don’t ensure all conditions are satisfied, it’s possible for the sales contract or loan approval to expire before you secure your loan.

How to Lock in Your Interest Rate and Loan Terms

Once the home you plan to buy has been appraised to determine its value, it’s time to consider locking in your interest rate and terms. This is known as an appraisal report. This will be provided to your lender, First, get your lender’s current rate sheet and compare it with the one you received when you were pre-approved. This will show you how interest rates have changed since you began the home loan process. Then you can sit down with your loan officer and review your alternatives.

The Lock Period

The lock period is the length of time you have to close the loan and still ensure you receive your locked in interest rate. Lock periods of 15, 30, or 45 days are available. If you have a 45-day escrow, you can lock in immediately and ensure your rate, so long as you close your loan within that 45-day period. Alternatively, you could wait 15 days and lock for 30 days at a slightly lower price, but you take the risk that the good rate you got 15 days before may no longer be available. Interest rates can change a lot in 15 days. That’s why it generally makes sense to lock in right away and avoid the risk of paying a higher interest rate.

Here’s an example scenario of the value of locking in your rate. Let’s say you can lock in for 6% and 1 point today, but you choose not to do that. If rates increase, and 15 days later the rate is 6.375%, you lose money. It may not seem like much of an increase, but that slight percentage bump means you pay $375 more per year for every $100,000 you borrow. For a 30 year loan, that could cost you more than $11,000.

Lock confirmation

Once you lock in your rate, get a copy of the lock confirmation from your lender. This confirmation is not customarily sent to borrowers. It is the only way to verify all sources of origination fees, borrower names, loan terms, the interest rate, and the date and length of lock.

With the lock confirmation, you can verify that your loan officer has honored the agreement you were originally offered. Without it, the loan officer could charge you points “to lower the rate,” but leave it high enough to get undisclosed points from the lender, too. A loan rep might even charge you to lock in but not do so, and keep the fee if rates hold.

As you embark on the mortgage process, learn more about mortgages and the home-buying and financing process in our Credit Learning Center.