MORTGAGE

What is it?

When you purchase a home, chances are you’ll need to obtain financing (i.e., a loan) in order to have enough money to pay for the property at the closing.  The most common type of loan obtained by a buyer for the purchase of residential real estate is a mortgage loan, which means a loan that’s secured — or collateralized — by the property that’s being purchased. 

The basic framework of a mortgage loan is this:  The lender gives you the money to buy a property, in exchange for your promise to pay back that money over time, plus interest.  You also pledge your new home to the lender as collateral (or security) to protect the lender in the event that you fail to meet your loan repayment obligations.  If you default on your repayment obligations, the lender can foreclose on (take possession of and sell) your property to recoup its losses.

It’s during the Mortgage phase of the closing process that you undergo a rigorous loan approval process with a lender of your choice to obtain a mortgage loan for your purchase of the property. 

The basic parts of the mortgage approval process are:

• Submit a mortgage application and supporting financial documentation;
• Undergo financial scrutiny by the lender to determine creditworthiness;
• Obtain a mortgage commitment from the lender;
• Satisfy remaining loan conditions;
• Obtain final loan approval and clearance to close.

Our explanation of the Mortgage phase of the closing process focuses on the basic steps of the mortgage application and approval process and how to make it a smooth and efficient experience.  For guidance on specific mortgage products and types, and their suitability for your particular needs, consult with a mortgage professional.

Why is it important?

Most buyers don’t have the financial means or liquidity to make an all-cash purchase of a home.  If you need financing to complete the purchase of your new home, your Contract will contain a mortgage contingency, which is a provision that makes your obligation to complete the purchase of the Property contingent upon your ability to obtain a mortgage commitment from a lender within a specified amount of time, usually 30 days from the conclusion of Attorney Review. 

A mortgage commitment is a lender’s written promise to loan you money, as long as you can satisfy certain final conditions listed in the commitment itself.  If you can’t get a mortgage commitment within the allotted time, then the mortgage contingency in your Contract gives you (and oftentimes the Seller, too) the right to terminate the Contract.

How does it work?

Once Attorney Review has concluded and you have a binding Contract with the Seller, it’s time to dive into your mortgage application.  

The Mortgage phase is the longest phase of the closing process.  Unlike the other six phases, the Mortgage phase doesn’t end before the next phase begins.  Instead, the Mortgage phase begins as soon as Attorney Review is concluded and doesn’t really end until the closing itself, when you sign the loan documents and close the loan, triggering the release of the loan funds to be used to complete your purchase of the property.

Step 1:  Choose a Lender

You should aim to pick a lender as soon as possible after Attorney Review concludes, ideally within the first five (5) days.  Getting off to a swift start with the mortgage approval process is crucial because of the time limit set in your Contract for you to obtain a mortgage commitment:  most commonly 30 days from the conclusion of Attorney Review.

That said, perhaps the #1 mistake that buyers make when it comes to their mortgage is not shopping around for a lender.  According to a 2015 government survey, a whopping 47% of borrowers didn’t compare lenders.  When you consider that buying a home is one of the largest, most important financial investments you’ll make in your lifetime, and that you’ve probably spent more time than you’re willing to admit researching TVs or mobile phones — this statistic is mind blowing.  

The differences in overall life-of-loan cost savings between different loan products can be staggering, and you’ll miss out on these potential savings if you don’t shop around.  The government’s report on the 2015 survey explains it like this:

Consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates.  For example, our research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent.  Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month.  Over the first five years, you would save about $3,500 in mortgage payments.  In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.

To ensure that you’re not unwittingly leaving major money on the table, be sure to get quotes from at least three or four different lenders.  Consider not only the big commercial banks, but also smaller institutions like community banks, mortgage companies, and even credit unions.  You should aim to speak with a handful of lenders of varying types and whittle down your choices to the final few contenders by the time Attorney Review concludes and the Mortgage phase begins.  

Mortgage Bankers vs Mortgage Brokers

The lending professionals you’ll encounter while doing your research will generally fall into one of two categories: (i) mortgage bankers, or (ii) mortgage brokers. 

Generally speaking, mortgage bankers work directly for the lending institution that’s loaning you the money; also known as loan officers, they’re in the business of “selling” their employer’s mortgage loan products to homebuyers like you.  The lending institution that employs them is known as a “direct lender.”

Mortgage brokers, on the other hand, don’t work for a specific lending institution but, rather, have relationships with multiple lending institutions and are able to shop your loan around to those lenders to find the best match; they then function as an intermediary or middle man between you and the ultimate lending institution that issues your loan.

It may not always be entirely clear to you whether you’re dealing with a direct lender or a mortgage broker.  Some financial institutions even operate as both.  Because brokers earn commissions from lenders on the loans that the brokers originate, you should always ask the person you’re dealing with if they’re a broker and, if so, what broker-related fees you may have to pay.  And you should be aware that broker-related fees may not always be labeled as such — they might take the form of an origination fee, points to ‘buy down’ the rate, or something else.

Loan Products

When you’re shopping around for a lender, you’re in large part shopping around for the best loan product to meet your needs.  Every lending institution has its own array of loan products that it offers to buyers according to each buyer’s financial circumstances, means and plans.  Typical features of a loan product are:

Eighty percent (80%) LTV (a.k.a. “20% down”), 30-year fixed-rate conventional loans tend to be the bread-and-butter of mortgages and buyers’ offers.  The 80-20 loan has become such a benchmark because it offers the highest percentage loan amount relative to the purchase price (80%) that doesn’t require buyers to pay for private mortgage insurance (“PMI”). 

PMI is an insurance policy that covers the increased risk that a lender takes on when it lends money to a buyer in an amount that’s over 80% of the value of a property.  While the PMI policy covers the lender, it is the buyer who must pay for the policy.  So as a general rule, loans that are larger than 80% will require you to pay a monthly PMI premium, along with your monthly principal-plus-interest payment, until your equity in the property reaches 20%. 

On the flipside, from the Seller’s perspective, a 20% down payment is viewed as a sufficiently large enough amount of money to reassure the Seller about the Buyer’s financial means and stability.

However, the 80-20 conventional loan is by no means the only game in town.  There are many other loan products available to meet the needs of buyers of all types, whether you’re looking to put down 5% or 50%, you’re a military veteran who qualifies for a VA loan, or you’re looking to rehab a fixer-upper with an FHA loan.  And beyond interest rates alone, each lender will have its own service offerings and incentives to attract customers and enhance the borrowing experience, as well as its own fee structure.

Comparing Lenders: Quotes & The Loan Estimate

When you’re shopping around for your loan, the initial rate quotes you obtain from lenders will come in all shapes and sizes, because quotes are not a standardized document in the industry.  Information about the loan being offered will differ across rate quotes, making it more difficult to accurately compare the quotes.  Additionally, because interest rates can fluctuate daily, rate quotes can quickly become moot.  

For these reasons, the most efficient way to compare lenders and the loan products they’re offering is to obtain a Loan Estimate from each of your final contenders once you’ve whittled down the pool and are ready to act, so you can be sure you’re comparing apples to apples.  

A Loan Estimate is a standardized document that was created by the federal government to make loan information more transparent and easier to understand for consumers, and easier for consumers to compare between different lenders.  It not only lists the specific features of the loan product being offered to you — such as the loan amount, term, interest rate, monthly principal and interest, fees, costs, and Annualized Percentage Rate — but also provides you with some key figures for the closing, including estimates of your closing costs and the total amount of money you’ll need to bring to the closing (a.k.a., your “Cash to Close“). 

By law, a lender must provide you with a Loan Estimate within three (3) business days of you submitting a “mortgage application” to them.  But don’t worry, submitting a mortgage application doesn’t lock you into using that particular lender.  It simply means you’ve provided them with the following six (6) pieces of information, which together constitute a “mortgage application” pursuant to federal regulations:

1. your name;
2. your income;
3. your Social Security Number (in order to obtain a credit report);
4. the address of the property you’re purchasing;
5. an estimate of the value of the property;
6. the amount of the mortgage loan you’re seeking.

Conveniently, these six pieces of information can be given to a loan officer any number of ways — over the phone, in person, via the Internet, through email, etc.  And note that a lender can’t require you to submit any supporting financial documentation until it has provided you with a Loan Estimate.  

Once you’ve received Loan Estimates from your final lender contenders, take a close look at them and compare them, line item by line item.  Note any significant differences and raise them with the lenders.  Besides the rate, the main focus of negotiation will be lender fees and loan costs.  And don’t be shy about playing the lenders off of one another — it’s not only recommended, it’s expected and represents the best and quickest way to get to a final decision.

Want a detailed explanation of your closing costs?

CHECK THIS OUT: Understanding Your Closing Costs as a Buyer

STEP 2:  Complete a Mortgage Application

Your lender will have you complete a mortgage application form and will then begin formally processing your application, kicking off the loan approval process that will continue nearly until the closing itself. 

For conventional loans, the mortgage application is a standardized form called the Uniform Residential Loan Application (Form 1003).  It looks like this.  In addition to the six (6) pieces of basic information we mentioned above as constituting a bare minimum “mortgage application” under the law, Form 1003 asks for detailed information about your financial circumstances that the lender will use to determine your credit worthiness, including your employment/income history, assets and debts and credit history.

STEP 3:  Receive and Sign Initial Disclosures, including a Loan Estimate

Lenders are required by law to issue certain initial disclosures to you within three (3) business days of your submission of a mortgage application.  The purpose of these disclosures is to ensure that you understand the terms of the loan you’re applying for, including not only the features of the loan like rate, term and monthly payments, but also the loan costs and closing costs you’ll incur.  You’ll need to review and sign the initial disclosures to acknowledge your receipt of them, before the lender can proceed with the mortgage approval process. 

Included among the initial disclosures will be a Notice of Intent to Proceed and a Loan Estimate.  A Notice of Intent to Proceed is just that — a way for the lender to get your written confirmation of your intent to proceed with applying for a loan with the lender.  As explained above, a Loan Estimate is a form document created by the federal government to help make loan information easier to understand for borrowers.  (You may have already received a Loan Estimate during your lender shopping if you obtained Loan Estimates to compare lenders.)  

Once you receive the Loan Estimate, review it to make sure it accurately reflects what you understand to be the loan product you’re applying for.  If you have any questions about individual line items on the Loan Estimate, raise them with your loan officer or loan processor, who are your two main points of contact on the lender team servicing you.

Note that, while the Loan Estimate is just that — an estimate, rather than a guarantee — the various “Loan Costs” and “Other Costs” reflected on the Loan Estimate are subject to tolerance rules under the law, which helps to maintain their accuracy within a tight range.  If, at the closing, any differences between the actual vs. estimated costs have exceeded their allowable tolerances, this would constitute a tolerance violation by the lender and require that the lender refund the amount of the overage to you at the closing.  This ensures that lenders estimate costs reasonably accurately and don’t pull a bait-and-switch on consumers.

STEP 4:  Loan Processing

Now that your loan application’s been submitted, the loan processing stage gets into full swing.  This is the process by which you prove your credit-worthiness to the lender, so that the lender can ultimately approve you for the loan and release the loan funds to you at the closing.  It involves income verification, an examination of your assets and debts, and a deep look into your credit history and credit score.

Your loan officer or mortgage broker who you’ve been dealing with up until now hands over the reigns to the loan processor on his or her team, whose job it is to collect all of the necessary financial documentation from you to ready your loan file for Underwriting review.  Underwriting is when everything in your loan file is heavily scrutinized by an individual who’s been trained for that specific purpose, to determine whether there are questions raised by your financial circumstances that need to be answered or issues that need to be cleared up.  

The loan processor will let you know exactly which financial documents and information you need to submit to compile your loan file for underwriting review.  The basics are:  

• W-2’s for the last two years
• Pay stubs for the last 30 days
• Tax returns for the last two years
• Bank statements for the last two months
• Brokerage or retirement account statements for the last two months
• List of monthly debt payment obligations
• Monthly statement for any current mortgages, or a record of rent payments for the last 12 months

But these are only the beginning, and much more detail will likely be required from you depending on your personal financial circumstances, loan product and lender.  

Want to know what docs you’ll need for your mortgage application?

CHECK THIS OUT: Complete Checklist of Documents Needed for a Mortgage

STEP 5:  Obtain an Appraisal

During loan processing, in addition to providing financial documentation to the lender, you’ll also need to pay for an appraisal of the property, a cost of $400-600 on average.  Payment for the appraisal is made to the lender (you can pay by credit card), and your loan processor then orders the appraisal from an independent, third-party appraisal company.  The turnaround time for appraisals is generally 7-14 days from request to completed report.  In light of how lengthy the appraisal process can be, and the fact that the lender needs the appraisal report to issue its mortgage commitment, it’s important that you, your lender, your agent, and your attorney keep tabs on the progress of the appraisal, to ensure that it’s moving along as expected.

The appraisal is a crucial part of your loan application, as the lender bases its loan amount on the higher of the purchase price and the appraised value.  Say, for example, you’re under Contract to buy a property for $500,000 with an 80% loan, but the appraisal comes in at $490,000.  The lender will loan you 80% of $490,000, which is $392,000, when you thought you were going to get 80% of $500,000, which is $400,000.  Unless you still qualify for a $400,000 loan — only now it will be an 81.6% loan — and are willing to pay any increased interest rate, loan costs, and PMI associated with this revised loan product, you’ll either have to bring additional down payment money to the closing to make up the $8,000 shortfall or seek a price adjustment from the Seller if your Contract contains an appraisal contingency allowing you to do so.

STEP 6:  Loan Underwriting

Once you’ve submitted all requested documentation to your loan processor, your loan processor will submit your loan file to Underwriting. 

Underwriting is the review process by which the lender takes a close, hard look at your credit history, finances, debts and assets, and various other factors impacting your financial circumstances, to assess your ability to repay the loan and determine your credit risk to the lender.

Your loan file will be assigned to an individual Underwriter who’ll review the documentation in your file and decide, generally within the span of a few business days, whether to:

1. approve your loan and issue a mortgage commitment, subject to certain remaining conditions; or
2. require that you submit additional documentation to clear up any issues or questions the Underwriter has identified with your file. 

If the latter, your loan processor will relay to you what additional documents are needed from you, and you should then gather and submit those documents as quickly as possible for the Underwriter’s further review.

STEP 7:  Obtain a Mortgage Commitment  

Once the Underwriter is satisfied with her review of your loan file, she will approve your loan and issue you a mortgage commitment, one of the key milestones in the mortgage approval process.

A mortgage commitment is a letter stating the lender’s promise to loan you the requested money as long as you satisfy certain final conditions.  In this sense, a mortgage commitment is a conditional approval, rather than a guarantee that the lender will close your loan.  The final conditions you need to satisfy are typically listed in the commitment letter itself and include standard items like proof of homeowners’ insurance, a title policy to cover the lender’s interests, and verbal verification of your employment within 10 days of the closing… as well as items more specific to your loan file, such as letters of explanation for certain credit inquiries or address variations in your credit report, copies of lease termination letters, or gift letters from relatives. 

Notably, a mortgage commitment is not a standardized or uniform document — each lender has its own format, content and name for the document.  Some lenders call their version a “Conditional Loan Approval,” while others call it a “Commitment Letter”.  Lenders also work at different paces in issuing mortgage commitments.  Some lenders have no problem issuing mortgage commitments with long lists of remaining conditions, while others wait for loan conditions to be cleared up before issuing a “clean” commitment containing only the standard final conditions.

Once you’ve received your mortgage commitment you should review and, if a signature is required, sign and return it to your lender.  You should also forward a copy of the commitment to your attorney, who will in turn send a copy to the Seller’s attorney.  

Signing the mortgage commitment does not obligate or commit you to actually borrowing the money; it simply functions as an acknowledgment for the lender’s purposes.  However, vis-a-vis the Seller, your receipt of a sufficiently clean mortgage commitment from a lender (regardless of whether you sign it or not) will satisfy the mortgage contingency in your Contract, so you’ll have to proceed to closing and will need the mortgage funds to do so.

STEP 8:  Clear Remaining Conditions in the Mortgage Commitment

Once you receive the mortgage commitment, your next task is to work your way through the list of remaining conditions and provide the requested items to the underwriter so they can be cleared — i.e., removed — by him or her.

Note that, because of the ongoing nature of the Mortgage phase of the closing process, from a timing perspective the clearing of remaining conditions in the mortgage commitment usually happens during the Preparation for Closing phase, during which all remaining loose ends of the transaction are tied up in preparation for the closing.

STEP 9:  Obtain “Final Loan Approval” and “Clearance to Close”

Once all remaining conditions in your mortgage commitment have been cleared, the underwriter will give you “final loan approval,” which are the magic words that mark the end of the mortgage loan approval process.  They’re also the green light for the lender to issue you “clearance to close,” a designation that sends your loan file to the lender’s Closing Department for final closing preparations.  (“Final loan approval” and “clearance to close” are often used interchangeably.)  

Your loan processor will notify you when your loan file has received final loan approval/clearance to close and will ask you or your attorney for your preferred closing date and time.  Your file is then assigned to an individual “Closer” within the lender’s Closing Department, who will begin working with the settlement agent and your attorney to prepare and finalize all of the paperwork for the loan closing, which is the first part of the closing.  Check out the Preparation for Closing phase of the closing process for detailed information about these final preparations.

Note:  Most commonly, buyers obtain final loan approval/clearance to close from their lender sometime during the Preparation for Closing phase of the closing process, i.e., after the Inspections and Title phases have been completed.  In fact, much of the Preparation for Closing phase is concerned with waiting for the lender to utter those magic words so that the closing can be scheduled and the closing documents prepared.  See Preparation for Closing for further details.

How do I prepare for it?

1.  Gather key financial documents and information, and get your credit in order, as early as possible before you begin house hunting.  For a detailed list of documents you’ll be required to provide to your lender, check out Complete Checklist of Documents Needed for a Mortgage.   

2. Start shopping for lenders before you start house hunting.  This may sound illogical at first, but you need to speak to lenders early on in the home buying process so you can find out how much you’re able to comfortably borrow in the first place.  This will, in turn, determine the price range of homes you’ll look at during your house hunt.

As you speak with more and more lenders (of varying types), you’ll be able to gradually whittle down your choices so that by the time you find a home you like and have an accepted offer, you’ll be down to the final few contenders and positioned to hit the ground running with a chosen lender by the time Attorney Review concludes.

3.  In a seller’s market, see if you can get “credit approved” before you go house hunting, to both strengthen your offers and get a big jump start on the mortgage process. 

Every time you make an offer on a property, you’ll need to submit a mortgage pre-approval letter from a reputable lender along with your written offer, as a baseline assurance to the Seller that you can obtain the funds you’ll need to pay for the property at closing.  But pre-approvals aren’t the same as getting actual loan approval (i.e., a mortgage commitment), since they don’t undergo the rigorous scrutiny of true underwriting; instead, they’re generated through an automated underwriting system. 

And because all bidders will be submitting a pre-approval, there’s nothing about your pre-approval that will make you stand out in a bidding war situation.  (“Pre-qualification” letters are even easier to obtain than pre-approvals, since they are based on the buyer’s credit score and only verbal statements of financial means to the lender, without any supporting documentation.)

A credit approval, on the other hand, raises the ante significantly.  A credit approval is given to you by a lender when you’ve verified income, employment, debts and assets with actual documentation, and your credit history/profile has undergone the rigorous financial scrutiny of underwriting, just as it would during the typical mortgage application process that happens after a contract has been formed.  The lender determines that you’re approved for a loan up to a certain amount, subject to a satisfactory appraisal, basically telling the Seller that you’re just one step — one appraisal — away from a mortgage commitment and also that you’re a serious, proactive buyer looking to move through the purchase process quickly and efficiently.

Important Things to Remember:

*  The Mortgage phase is ongoing until the closing!  Once the Mortgage phase starts (right after Attorney Review), it will continue until the closing, at which point you will close on both your mortgage loan and the title to the property.

*  At the beginning of the Mortgage phase, when you’re choosing a lender, you should simultaneously be arranging for your home inspections.  The Inspections phase begins at the same time as the Mortgage phase — they both begin upon the conclusion of Attorney Review.  Typically, you’ll have anywhere from 7-14 days from the date that Attorney Review concludes to complete your inspections of the property and submit any repair requests to the Seller, and 30 days from that same date to obtain your mortgage commitment.

Note that, even though the Mortgage and Inspections phases begin concurrently, we represent them in our Closing Road Map as occurring in sequence, for your ease of understanding the general flow of the closing process.  We show the Mortgage phase as coming first because of the critical importance of getting your mortgage application underway as soon as possible once Attorney Review ends.  This is because the mortgage commitment is the buyer deliverable that is the most out of your hands (you’re at the mercy of the lender) and oftentimes the most unpredictable from a timing perspective, so you don’t want to waste any time getting your mortgage application underway.