Let’s be honest, getting a mortgage is not the most fun process. I mean really, how many times in a lifetime does a person get a home loan? For most people, it’s usually not more than a few times. Yet, it is likely the biggest purchase that you will make in your life. Let’s dive deeper and find out what is going on to make a home loan come together. More specifically, lets take a look at the process of getting a home loan with Grizz’s Home Loans.
Grizz’s Home Loans is a mortgage broker company. This means that we have access to multiple lenders to help a borrower find a loan product that best meets their goals. Most commonly, the goal is to find the best rate with the best costs and rightfully so. The lowest rate is not always the best rate. I’ll explain that in another post, but for now, I want to focus on the process. I want to stretch my hard earned dollars and would expect the same for you. We work hard day in and day out trying to provide for ourselves and our families. Let’s be wise on who we use and trust with the biggest transactions we will likely make. I hope to help you alleviate some stress and anxiety that you may be feeling as you embark on the journey of getting a home loan.
The first step to getting a home loan is to contact a trustworthy loan officer. Loan officers are frequently called other names like loan originators, mortgage loan originators, MLO’s, or even lenders. Most of these terms are correct, but some are erroneously used. I just want you to know there are multiple names that you will hear from other parties that are referring to a loan officer. A loan officer will talk with you and discuss your goals. This includes what purchase price you may be hoping for, your job history, your plans for down payment and where those funds are located, and credit history among other pieces of information. It’s as if we are asking for multiple pieces to complete a delicate puzzle. Sometimes the puzzle is super easy. Good credit, large down payment that’s already in the bank, and a great paying job will likely lead to an easy loan and super smooth process. Rough credit, high debt-to-income (DTI) ratios, and no down payment in the bank account can lead to a more difficult process.
Once the loan officer is able to see what the puzzle looks like, he/she can start putting things together to determine how much of a loan you may qualify for and help you decide on what loan program will best fit your goals. Your loan officer will want to see income documentation (usually last 30 days of paystub for W2 employees, or up to two years in personal and business tax returns for those who are self-employed), assets (typically 2 months of bank statements showing down payment funds), and a credit report. The credit report will show debts that are reported to three main credit bureaus (Experian, Transunion, and Equifax) and what your credit score is for each bureau. We will use the middle score of the three bureaus to determine the credit score that will be used for the loan. When there are multiple borrowers, the lower middle score will be used.
Once it is determined that you qualify for a loan, a prequalification letter can be issued. We like to go a step further and run your file into a system called AUS (Automated Underwriting Software). Conventional loans can be run through two different types of software. One is called Desktop Originator (DO) and the other is called Loan Prospector (LP). DO is used when a loan is underwritten according to Fannie Mae guidelines and LP is used when the loan is underwritten using Freddie Mac guidelines. They are very similar, but they each have differences that may approve or deny a loan based on a specific scenario. An experienced loan officer should be able to determine which guidelines should be used for underwriting for a specific scenario.
Once we have thrown your information into this software and the program accepts that results, it will spit back out a term that states Approve/Eligible or Approve/Accept. This is usually referred to as an “approval with AUS”. At this point, we can issue a preapproval letter. Some realtors will ask for a prequalification letter and some will ask for a preapproval letter. A preapproval letter carries more weight in the realtor world, but in reality, I have seen some prequalification letters carry more weight than some preapproval letters depending on the loan officer and their company. Grizz’s Home Loans will strive to give out preapproval letters based on the criteria above.
Once you have this pre-approval letter, the house hunting begins. You can choose the realtor you use. We have worked with hundreds of realtors and can also give you names of some realtors we enjoy working if you desire. I will explain more the process of realtors, buying and selling agents, and their commissions in another post. When you have found a home that you want to buy, you will then place an “offer” on the home. The offer is a contractual agreement that includes the price and conditions that a buyer is willing to purchase a home for from a seller. The seller may decide to accept the terms, change the terms, or reject the terms. When a seller has accepted the terms, the home is then considered to be “under contract”. This is a very exciting time when searching for a home, but this is also the point where things get more stressful.
The loan officer should be notified right away when a borrower goes under contract. This will allow the loan officer to look at the file and get start working on getting the appropriate disclosures out. Disclosures are going to be a packet of documents that will contain several legal disclosures as well as one called a “Loan Estimate”. I feel the loan estimate is the most important for the borrower to understand because it breaks down the numbers and details of the anticipated loan. When the rate is locked, your principal and interest payment should not change unless there is a change in the loan amount or unless the lock expires. Pay attention to these disclosures and make sure the information is accurate. If you have questions, your loan officer should gladly help you go through the disclosures and explain every singled document to you. This is a big purchase so you should know what you are getting into. There are some items that can change on the Loan Estimate, but I will go into more details of the Loan Estimate in another post.
The loan officer also needs to know the Title Company that the borrower is going to use. The borrower can decide on the title company in most transactions, but often times, the realtor has a preferred title company that the borrower will use based on the realtors reference. The title company helps to make sure there are no liens on the property so there aren’t any issues with identifying ownership of the property after the property has been sold. They also make sure funds are allocated accurately to each party in the transaction. There are a few other things that title companies do that help the loan officer clear up questions in regards to county records, including taxes. A title report will show the amount of taxes due and this amount is important to help calculate the entire mortgage payment. The funds from taxes and insurance are placed into an account called an escrow account. The purpose of an escrow account is to pay out the money due for taxes and insurance at the time they are due. In this manner you will not need to come up with lump sums on an annual basis or when they may be due since you have been paying the taxes and insurance within your full mortgage payment.
Realistically, you should have gone over some numbers and scenarios with your loan officer during the preapproval process. The loan officer should give you some idea of where they believe the market is and where it’s headed. No one ever really knows for sure because it is all speculation, but they can help you understand what is going on. Rates change on a daily basis and even multiple times during a day so the numbers discussed in the preapproval process could vary depending on what the market is doing.
One of the documents that is signed in the disclosures is called an “Intent to Proceed”. Legally, this document has to be signed before ordering an appraisal that will be considered legitimate to the lender. Anyone can order an appraisal at anytime, but many consumers do not understand the rules to order a residential appraisal when getting a mortgage. The borrower does not order the appraisal, but the loan officer or one of their assistants/processors will order the appraisal. Appraisal turn times vary by state and location. The appraisal usually takes the longest for a single step because there are limited appraisers available and it take some time to dig into the market and compare other properties to come up with a value. Appraisers try to come up with an objective value, but if you were to use five different appraisers, you may come up with 5 different values.
There are times when an appraisal is not needed. This depends on the quality of the borrower as well as the type of home. This is referred to as an appraisal waiver or property inspection waiver (PIW). The appraised value is important for the lender to determine the risk of the amount of loan given against the value of the property, also know as Loan-to-Value (LTV). For example, if my house is worth $100k and my mortgage against my home is $97K, then my LTV is 97%.
So up to this point, we have been preapproved, gone under contract, signed initial disclosures, and ordered the appraisal with the help of your trusted loan officer. The loan officer will then make sure the file is ready to be sent to underwriting. Part of finalizing the file will be to get the appraisal and also to make sure homeowner’s insurance is in place. This is a task for the borrower. Some borrowers will shop around and others will just use their same insurance they use for their auto insurance. The borrower will need to decide on who they want to use and let their loan officer know. The loan officer will then request a document from the insurance company showing the amount of the annual premium. This amount will usually be divided by 12 to determine the cost needed to pay the insurance each month into your total housing payment. Again, the taxes and insurance are usually paid into an escrow account.
The file should then be submitted to underwriting. There is an actual person, who is a licensed underwriter, that will look at your file file to determine if your file meets underwriting guidelines. The guidelines will vary depending on the loan program that is used. If there is anything that needs more explaining or something that is unclear, the underwriter will “condition” for the information. A condition is similar to a checklist item to a loan officer. Some are easy and some can be complex, depending on what is happening in the transaction. Once the underwriter is satisfied with all conditions and feels it meets guidelines, the underwriter will issue a “Clear to Close” (CTC). The underwriter will need to be satisfied with the title report, homeowner’s insurance, income, assets, credit, appraisal, and anything else pertinent to the transaction.
It is usually about this time or just prior to Clear to Close, that another disclosure is sent to the borrower. This disclosures is called the “Closing Disclosure” (CD). The closing disclosure is similar to a loan estimate but it should be even more accurate to the final numbers. We try to send out the CD as quickly as possible because it is required that a CD is signed 3 business days before closing on a transaction. There are some numbers that can still change, but the initial CD needs to be within certain tolerances and on some items, there is no tolerance, meaning that certain numbers are not allowed to change. The most common items I see changed are based on prorations for taxes and changes in daily interest. The daily interest collected will be different every day of the month. If the borrower has purchase the home near the time taxes are due, the borrower shouldn’t be liable for the taxes for the entire year. The seller will be responsible for paying the taxes for the amount of time the owned the home, thus there is typically a proration to make sure everything is “balanced” at the time of closing. When the CD is balanced, it should become the final CD and will be the CD that is signed at closing along with other legal loan documents.
The closing, also referred to as settlement, is when the borrower and seller go into the title company (at separate times) and sign documents. This includes deeds that transfers ownership. There is a method and process to make sure the transfer of funds and ownership happen legally and accurately. Once the file has closed, certain documents are recorded with the county for the transaction to become official. The borrower will then receive their keys to their new home according to the contract. It’s then time to move and order some pizza!
The loan process usually takes anywhere from two weeks to a month, depending on the transaction, once the borrower is under contract. The states I have been licensed in are Utah, Idaho, Wyoming, and Washington. Other states may vary on their process and their terms. I have broken down the process based on what to expect in getting a loan in these states. There is a lot more to the whole process, but I’ve identified the key points that a borrower should expect to see. Keep in mind that most transactions have something unique about them. That’s one of the reasons I enjoy helping borrowers get a mortgage. The job doesn’t always feel the same and there are certain paths to take that are easier than others depending on the circumstances. Don’t hesitate to reach out if you have questions based on your circumstances.