The real estate market is finally beginning to show signs of recovery after more than four years of decline. As the home-buying market starts to pick up, many of the consumers driving this growth will be first-time home buyers who need to obtain a mortgage loan to get their first home – but may be confused or stressed by this new experience.
Here are some tips and steps to help guide you along the way.
Choosing a Lending Institution
Some people have never applied for a loan in their lives, let alone a huge mortgage loan. This can leave them dazed and confused when it comes time to speak with a loan officer.
One of the most difficult steps in obtaining a loan involves finding the right lending institution. If a borrower chooses the wrong lending institution, they may not be able to get the right loan for their home purchase or the best loan for them.
Lending institutions have the power to decide whether or not the borrower should have the loans they seek. Borrowers rely on the mortgage lenders to lock in a good interest rate and provide a secure loan approval commitment that they can then use to proceed to the closing of their home purchase. As you shop for a mortgage lender, avoid banks or mortgage companies who stall on locking in your interest rate. In addition, borrowers rely on lending institutions to close the loan on time, especially with real estate purchases. Lenders who stall on these practices can cause nightmares later on in the loan process.
Before you meet with a mortgage lender, gather all of the required documentation to present to the lending institution in an organized file to help streamline the application process. The information contained within this folder should address what type of loan the borrower wants from the lender, as well as your recent pay stubs, tax returns and bank statements, as well as the signed real estate contract (if available).
Before picking up the phone or sending over an e-mail, do some online research to compare interest rates between competitors. By doing this, borrowers will have the upper hand during the negotiation process. In addition, study the types of lending institutions available, including the advantages and disadvantages they offer for different situations.
Direct lenders distribute money from their own reserves, while brokers find a third-party. Although direct lenders are convenient, some agents and brokers may be able to compare rates from different lenders. Inquire with each mortgage lender about the interest rate, fees, points, and other terms attached to the loan. Confirm with the lender if the supporting documentation meets the conditions of the loan.
- How to Get a Loan and Manage Your Debt
- Know Before You Go to Get a Mortgage
- Homebuyer Resource Guide
A Basic Look at the Loan Process
After finding the right mortgage lending institution, the next step for many borrowers is to apply for a pre-approval. Contact the lending institution for specific steps on submitting this information. Sometimes, this can all be done online.
The pre-approval process typically takes between one and two days to complete. Depending on the loan type, borrowers can lock in their rate after the lender has issued a preliminary approval.
The borrower will also need to sign the official loan application. Again, some lenders allow borrowers to do this online. Others, however, may require an actual signed hard copy of the application.
Next, the borrower must provide the supporting documents requested by the lender, along with the signed application. The mortgage lender then orders an appraisal report to determine the fair market value of the subject property, which can take 24 hours or more to process.
After compiling all necessary documents, the loan officer reviews the application and support documents before assembling a “loan package.” The loan officer will send this package to an underwriter for final approval, which can take between two and four business days.
The entire approval process can sometimes take between two and four weeks to process before the lending institution determines the borrower’s eligibility. One of two outcomes can arise from the approval process, including approval or denial. If the lending institution denies the borrower’s loan application, then they can forward it to another lender willing to distribute the funds. Next, the borrower attempts to meet the eligibility conditions for resubmission.
If the lending institution approves of the loan, they may have additional conditions that the borrower must meet before receiving a final mortgage loan commitment from the lender. After obtaining that loan commitment, the borrower can then proceed to the loan and real estate settlement transaction. At the closing, the borrower will sign several pages of legal documents and the lender wires the loan amount to the borrower’s settlement agent. These steps may vary from one lending institution to the next, depending on the type of loan involved in the process.
- Understanding the Loan Process: Managing Lender/Funder Relatinoships (PDF)
- Who’s Who in the Home-Buying Process
The Supporting Documents Needed for a Loan
Lending institutions will ask for supporting documentation to help determine whether borrowers qualify for a loan. For starters, mortgage loan applicants must document that they have enough assets for the transaction. To do this, they will need to provide copies of recent bank and investment account statements.
In order to prove that they have sufficient income to afford the loan, mortgage loan borrowers are typically required to provide employment and income documentation, including copies of recent pay stubs and tax returns for at least the past two years. If applicable, the borrower may also need to provide copies of divorce decrees (to document alimony or child support income) and pension award letters.
Lenders will may also request additional information to address any credit issues that arise from the borrower’s credit report, including copies of leases (if currently renting), canceled rent checks and documentation about certain debts. For more tips, check out the following links:
- The Mortgage Loan Process: What to Bring (PDF)
- What to Bring to a Loan Application (PDF)
- Preparing for Loan Processing