The Mortgage Process
Getting approved for a loan is the first thing you should do when buying a home. Unfortunately, applying for a mortgage is one of the most intimidating parts of buying a home for most people. The truth is that is not as bad as most people expect. The following information should give you a good idea of what to expect when you apply for a loan, and a general idea of what happens from the time you first speak to a loan office, to the actual closing.
Initial Interview
When you make contact with a loan office, the first thing they will do is ask you a number of questions about your overall financial situation. The loan officer will be asking about everything from how much you make, to how much you owe. You should be completely honest with your loan officer. They will be verifying everything you tell them. The bank will then obtain your credit report. Then, based on the this information, and the type of real estate transaction, the loan officer will recommend a loan program for you. The loan officer will then be able to tell you what you qualify for, estimate your payments, and provide a good faith estimate.
Good Faith Estimate
The good faith estimate(GFE) is your only way to evaluate one lender vs. another. Some lenders will have lower rates, but higher closing costs. Every bank and broker has different fees. For example, some lenders charge a 1% origination fee, while others do not. If you are buying a $150,000 home, that is an extra $1500 in closing costs that you have to pay. The annual percentage rate (APR) is the only true comparison. The APR has to include all closing costs and average it over the life of the loan to give you a total cost of borrowing money, as a percentage rate. For example, you may be quoted a rate of 5.5% but the APR could be 5.875. The APR will always be higher than the rate. If your loan officer does not offer to provide you a GFE, go somewhere else!
Pre-Qualification vs. Pre-Approval
At this point, you have what is known as a pre-qualification. The loan has not been approved yet, but if you have been honest with the loan officer, you can usually rely on this. The next step would be a pre-approval. To accomplish this the loan officer will need you to provide supporting documents, such as, W2's and bank statements. An underwriter will look over the complete file and issue an approval. In most markets in the Austin area, a pre-qaulification is sufficient for you to make an offer on a property. Most listing agents just want to see that a loan officer has evaluated your credit and financial situation, and that you are able to obtain financing. Your loan officer will then provide a pre-qualification, or pre-approval letter to your real estate agent. If you do not have a real estate agent, ask your loan officer to recommend one. You have a much better chance of getting a good buyer's agent if you ask for a referral.
Finding a Property
At this point you and your agent are ready to find a property that you want to purchase. If you have turned in all your documentation to the loan officer, you have gone as far with the financing portion of the transaction as possible. When you and your agent get a property under contract, your agent will send a copy of the executed purchase contract to your loan officer. At this point your agent may also be able to send a copy of an existing survey to the lender. Ask your agent if you have questions about surveys. The lender will now start processing the loan, and underwriting the property. The next step is to order an appraisal and a survey, if an acceptable one has not been provided. It is usually at this point when your loan officer will lock your rate in for the next 30 days. A rate lock guarantees you that specific rate if you close within the lock period. If your closing is scheduled more than 30 days out, you can purchase a rate lock extension. The fee for a rate lock extension varies by lender & time period requested.
Appraisal
Once your contract is submitted to the bank, one of the first things they will do is order an appraisal. The appraisal is performed by a certified appraiser that has been approved by the bank. Under no circumstances will the bank let you use your own appraiser. The appraisal is performed to protect you and the lender from over paying for a property. Most of the time, if your agent has performed a CMA on the property, there will be no problems with the appraisal. If the appraiser does not think the property is worth what you have agreed to pay for the property, you will need to renegotiate the sales price, come up with more cash, or terminate the contract and find another property. Ask your agent about making your offer contingent upon financing approval. This is a very common practice in Texas. If you are using a government loan to finance the purchase of a property, the appraisal will also include a cursory inspection of the property to make sure it meets FHA or VA guidelines. Your agent will be able to provide you with more information about these types of appraisals. If the appraisal comes in for at least the sales price, you can usually sit back and wait for closing.
Underwriting
Once the loan processor has put a complete file together that includes a contract, appraisal, survey, and your personal information, the file will go to underwriting. The underwriter will review the entire file, and make sure everything meets the banks guidelines for the loan program you are using. If everything is in order, the underwriter will fully approve the loan, and the bank will start preparing closing documents to send to the title company.
Settlement Statement (HUD-1)
Once the title company receives closing documents and instructions from your lender, the escrow officer will prepare a preliminary HUD-1 statement. Once this statement has been prepared, the title company will send a copy to the lender and to your agent for review. Don't be upset that everyone has seen this statement but you. You and the seller of the property should only see this statement after everyone has approved it. The reason is that the settlement statement contains everyone's bottom line, and it should not be sent to you until fully approved and the numbers are correct. Once the bank approves the HUD-1, they will issue an authorization to close to the title company.
Closing and Funding
Now you are ready to finalize the transaction. You and your agent will go to the title company to sign all the closing documents and pay any down payment and closing costs you are responsible for. Check with your agent. You will usually need a cashiers check for any funds you must bring to closing. Your loan officer may also attend to answer any questions you have, but most loan officers do not attend closings. Once you have signed all the documents, the title company will send fax them to the lender. The lender will review them to make sure nothing was missed, then they will issue a funding authorization to the title company. At this time the lender will wire money to the title company if they have not already done this. The title company will write checks to all parties that are entitled to collect money from the transaction, and you now own the property. Funding does not always occur on the same day as closing. Most of the time the transaction will fund the same day, or the next business day.