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Step 3: Loan Application & Processing

The loan application is one of the most important forms in the mortgage process. The application serves as the underwriter's source of who the borrower is and helps to determine how qualified they may be for a loan. Therefore, it is crucial to fill out the application completely and accurately.

At the same time, it is required by law that the borrower receive certain disclosures from the lender. These include the Annual Percentage Rate (APR), Finance charges, and the total of payments as well as any variable rate information, and other terms. The Real Estate Settlement Procedures Act (RESPA) disclosures provide information on known and estimated closing costs, mortgage servicing transfer, escrow accounts, and other important information. The Equal Credit Opportunity Act, The Right to Privacy Act, flood insurance statement, homeowners insurance statement, mortgage payment statement and the Tax Escrow Act are all provided to the applicant prior to completion of the application process. Within three days of the application being completed, the applicant will also receive information concerning closing costs and a Good Faith Estimate which describes what the closing costs will be for the borrower.

Responsabilities of the borrower usually include acquiring a pest inspection certificate (not over 30 days at the time of closing), a well/septic tank inspection (if applicable - not over 30 days old at closing), flood insurance verification (if applicable), a complete policy and one-year-paid receipt if the loan is a purchase, a declaration page of your current policy if the loan is a refinance and the mortgage clause of your lender should appear on the policy as Mortgage.

Once the application has been completed, the buyer may need to decide whether to float or lock the interest rate on the loan. If a buyer chooses to float, they agree to accept whatever the rate may be on a specified date in hopes of the rates lowering during the float period. However, they also run the risk of interest rates rising, and the possibility of no longer qualifying for the higher mortgage payments. On the other hand, if the buyer locks the loan, they choose the rate offered to them at the time of application, and they are guaranteed that rate until a specified date. If the loan does not close before the date, the rate is usually renegotiated according to the agreement.

After the loan officer finished the necessary paper work, all of the information is forwarded to the processing department where the information regarding the buyer and the property are checked for accuracy. One way of verifying information on the application is to mail verification forms (employment, rent, deposit, mortgage). A credit report is also ordered to determine if the buyer is responsible and financially able to pay the mortgage. In order to verify facts on the property to be purchased, the loan processor also orders an appraisal and a title report for the property.

You may be wondering the significance of an appraisal and title report. Mortgages are made based on the appraised value of the property or the purchase price, whichever is lower. Since the home serves as collateral for the loan in the case of the borrower defaulting, the lender does not want to grant a loan that is larger than the value of the collateral. This is also the reason why lenders require Private Mortgage Insurance (PMI) for conventional loans if the down payment is less than 20%. The title report is ordered to see if there are any liens against the property. Again, in case of the borrower defaulting, the lender wants to ensure that they are the only party that has claim to the property. If there happens to be another claim, the lender may base its decision on the priority of the claimholders list.

The processor's final responsibilities include compiling the completed forms and verifications and checking the credit report for discrepancies. If any are found, letters of explanation are requested of the borrower. In addition, if the loan is to be sold to an institution such as FHA, Fannie Mae or Freddie Mac, the processor must make certain that the appraisal meets their requirements. Once these procedures have been completed, all the information is sent to the underwriting department for approval.

The underwriter's job is to examine the applicant's file to determine if he and the property meet the requirements of the lending institution as well as the possible investor (FHA, Fannie Mae, etc.). Considerations include the buyer's ability to pay the loan, the availability of cash required to pay closing costs, the property's condition and value and the buyer's overall credit worthiness. The decision to approve, suspend or deny the loan is then made. The underwriter may choose to suspend the loan if he finds a piece of information missing such as a bank statement or a letter of explanation.

If the loan is approved, the file is moved to the closing department. At this time, the date, time and location for settlement is arranged, and the borrower is given a list of closing costs as well as a list of items which should be brought to the closing.

On the average, it takes between 30 and 45 days to have a loan approved. Is there any way to speed up the process? The best way is to be informed about the process and respond promptly to any requests or inquiries from the lender. You should take a look at our Checklist of Items and even print them out, so you can begin gathering most of the information that will be asked of you at the time of application.

Continue to Step 4