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The mortgage loan process explained in 9 steps: From pre-approval to closing day

Craig Berry
The Mortgage Reports contributor

Your guide to the mortgage process

The mortgage loan process can seem daunting, especially if you’re a first-time home buyer.

Luckily, you don’t have to go it alone. Your real estate agent and mortgage loan officer will be your guides.

But it still helps to know what’s coming at each stage of the process, so you can be prepared to ask the right questions and make good decisions.

Here’s what to expect.

Verify your home buying eligibility (Dec 3rd, 2020)

In this article (Skip to…)

  1. Estimate your budget
  2. Get pre-approved
  3. Shop for your home and make an offer
  4. Order a home inspection
  5. Go rate shopping and choose a lender
  6. Complete a full mortgage application
  7. Have the home appraised
  8. Mortgage processing and underwriting
  9. Closing day

1. Estimate your budget. How much home can you afford?

It’s important to take certain steps before kicking off the mortgage loan process.

Most importantly, you should estimate how much house you can afford. This lets you set realistic expectations for house hunting and choosing a mortgage loan.

Instead of seeking your maximum home purchase price, start by determining your budget for a monthly mortgage payment.

Instead of seeking your maximum home purchase price, though, it may be better to determine the monthly payment you can reasonably manage.

Then, you can work backward using today’s mortgage interest rates to determine your maximum home buying power.

What’s included in your mortgage payment

Current mortgage interest rates are an important part of the equation.

An interest rate change of just 1 percentage point, for example, could raise or lower your purchasing power by almost $40,000.

Similarly, real estate property taxes may be lower in a mature neighborhood as compared to one which is newly built. And, association dues for a condo can vary from building to building.

Homeowners insurance premiums may also be part of your monthly payment.

When you focus on a maximum monthly payment instead of a maximum home purchase price, you can be sure you’ve made a budget that accounts for all your ongoing housing costs — not just mortgage principal and interest.

You’ll also need to figure out how much you have in savings. This will inform how much you have for your down payment and closing costs.

Check your home buying budget at today's rates (Dec 3rd, 2020)

2. Get pre-approved for a loan

Once you’ve estimated your own budget, you might start looking at homes within your price range. This is also when you take the first step toward getting a mortgage.

That first step is to get a pre-approval letter from a mortgage lender. This letter shows how much money a mortgage lender has approved you to borrow, based on your savings, credit, and income.

You’ll want to do this before you make an offer on a house.

Having a pre-approval letter gives your offer a lot more clout, because the seller has solid evidence you’re qualified for a loan to purchase the home.

Realtors generally prefer a pre-approval letter over a pre-qualification letter, because a pre-approval has been vetted to prove your eligibility.

Note: getting “pre-qualified” is different from getting a pre-approval.”

Both terms mean a lender is likely willing to loan you a certain amount of money. But Realtors generally prefer a pre-approval letter over a pre-qualification letter.

That’s because pre-qualification letters are not verified. They’re just an estimate of your budget based on a few questions.

A pre-approval letter, on the other hand, has been vetted against your credit report, bank statements, W2s, and so on. It’s an actual offer from a mortgage company to lend to you — not just an estimate.

You are NOT required to stick with the lender you use for pre-approval when you get your final mortgage. You can always choose a different lender if you find a better deal.

Start your pre-approval here (Dec 3rd, 2020)

3. Shop for your home and make an offer

Now that you’ve been pre-approved, it’s time for the fun part — house hunting.

After visiting properties with your agent and picking out the home you want, it’s time to make an offer.

Your real estate agent will know the ins and outs of how to structure the offer. It may include contingencies (or conditions) that must be satisfied before the deal is complete.

When you make your offer, you’ll generally also submit your earnest money deposit.

The earnest money is a cash deposit made to secure your offer on the house and show you’re serious about buying. It can be as little as $500 or as much as 5 percent of the purchase price or higher, depending on local custom.

Speak with your real estate agent ahead of time about how large the earnest money deposit is likely to be, and be ready to write a check when you make an offer — especially if you’re buying in a competitive market.

4. Order a home inspection 

After your offer is accepted, the next step in the mortgage process is typically a home inspection.

A thorough home inspection gives you important details about the home beyond what you may be able to see on the surface.

Some of the areas a home inspector checks include:

  • Home’s structure
  • Foundation
  • Electrical
  • Plumbing
  • Roofing

Getting a home inspection is important because it helps the buyer know if a home may need costly repairs.

What is uncovered during an inspection can become part of a sales negotiation between buyer and seller, and their respective real estate agents.

5. Go rate shopping and choose a lender

You may have already decided on a mortgage company when you got pre-approved.

But if you’re still shopping, now that you’ve found a home and your offer has been accepted, it’s time to make a final decision about your lender.

When shopping for a mortgage, remember your rate doesn’t depend on your application alone. It also depends on the type of loan you get.

Look at a few different lenders’ rates and fees, but also ask what types of loans you qualify for. This will affect your rates and eligibility.

Of the four major loan programs, VA mortgage rates are often the cheapest, beating conventional mortgage rates by as much as 0.40% on average. Next are USDA mortgage rates. Third come FHA mortgage rates, followed by conventional rates.

So look at a few different lenders’ rates and fees, but also ask what types of loans you qualify for.

There may be much better deals available than what you see advertised online.

For a detailed explanation of how to compare offers and choose a mortgage lender, see: How to shop for a mortgage and compare rates

6. Complete a full mortgage application 

After selecting a lender, the next step is to complete a full mortgage loan application.

Most of this application process was completed during the pre-approval stage. But a few additional documents will now be needed to get a loan file through underwriting.

For example, your lender will need the fully executed Purchase Agreement, as well as proof of your earnest money deposit.

Your lender may also request updated income and asset documentation, such as pay stubs and bank statements.

You will receive a Loan Estimate within three business days which will list the exact rates, fees, and terms of the home loan you’re being offered.

7. Have the home appraised

Your lender will arrange for an appraiser to provide an independent estimate of the value of the home you’re buying.

Most lenders use a third-party company not directly associated with the lender.

The appraisal lets you know that you’re paying a fair price for the home.

Also, in order for the loan to be approved at the contracted purchase price, the home will need to appraise for the contracted purchase price.  

8. Mortgage processing and underwriting

Once your full loan application has been submitted, the mortgage processing stage begins. For you, the buyer, this is mostly a waiting period.

But if you’re curious, here’s what happens behind the scenes:

First, the Loan Processor prepares your file for underwriting.

At this time, all necessary credit reports are ordered, as well as your title search and tax transcripts.

The information on the application, such as bank deposits and payment histories, are verified.

Respond ASAP to any requests during this period to make sure underwriting goes as smoothly and quickly as possible.

Any credit issues, such as late payments, collections, and/or judgments, require a written explanation.

Once the processor has put together a complete package with all verifications and documentation, the file is sent to the underwriter.

During this time, the underwriter will review your information in detail. It’s their job to “nitpick” the information you’ve provided looking for missing items and red flags.

They’ll primarily focus on the three Cs of mortgage underwriting:

  • Capacity — Do you have the cash to pay for your loan?
  • Credit — Does your credit history show that you pay debts on time?
  • Collateral — Is the value of the property you’re buying sufficient collateral for the loan? (I.e. Did the appraisal show that the purchase price and home value are aligned?)

During the underwriting process, they may come back with questions. You should respond as quickly as possible to ensure a smooth underwriting process.

9. Closing day

You’ve made it the big day: closing.

The lender will send the closing documents, along with instructions on how to prepare them, to the closing attorney or title company.

Prepare yourself for a big stack of papers you’ll be signing.

One of the more important documents is the Closing Disclosure. It should look similar to the Loan Estimate you received when you originally completed the full loan application.

The Loan Estimate gave you the expected costs. The Closing Disclosure confirms those costs.

In fact, the two should match pretty closely. Laws prevent them from differing too much.

If everything is in order, you’ll sign all your documents, receive your keys, and just like that — you’re a homeowner!

Verify your home buying eligibility (Dec 3rd, 2020)

Mortgage loan process FAQ

What’s the best loan term for a mortgage?

The loan term or ‘repayment period’ on your mortgage determines how large your mortgage payments will be. It also determines how much interest you’ll pay in total.

Therefore, the best loan term balances your loan costs with your monthly budget.

Shorter loan terms cost less over time but have higher monthly payments. Most mortgages have 15- or 30-year loan terms. You can also find 10- or 12-year loan terms. You could even find an 8-year term through Rocket Mortgage’s “Yourgage” loan.

Is a fixed-rate mortgage better than an adjustable-rate mortgage?

A fixed-rate mortgage locks in an interest rate and payment for the life of the loan. With today’s fixed rates hovering around historic lows, a fixed-rate loan makes a lot of sense.

An adjustable-rate loan features a fixed rate for a while, but then the interest rate fluctuates with the market each year. Some borrowers choose an adjustable-rate mortgage (ARM) if they plan to sell or refinance the home within the first few years. Otherwise, ARMs can be quite risky.

How much down payment is required?

A larger down payment opens up more mortgage opportunities for borrowers, but not all new home loans require a large down payment.

The USDA and VA loan programs, for example, offer zero-down mortgages. Conventional loans typically require at least 3% down, and FHA loans require 3.5% down. The main drawback of a low-down-payment loan is that they typically require mortgage insurance, which increases your monthly payment.

A conventional loan with 20% down will prevent the borrower from paying mortgage insurance, because the new homeowner already has enough home equity to absorb the lender’s losses in case of a foreclosure. 

How long does the loan process take for a mortgage?

For most lenders, the mortgage loan process takes approximately 30 days. But it can vary quite a bit from one lender to the next. Banks and credit unions tend to take a bit longer than mortgage companies. Also, high volume can alter turn times. It may take 45 to 60 days to close a mortgage during busy months.

What does it mean when your mortgage loan is in processing?

“Mortgage processing” is when your personal financial information is collected and verified. It is the Loan Processor’s job to organize your loan documents for the underwriter. They’ll ensure all needed documentation is in place before the loan file is sent to underwriting.

What do loan officers look for when applying for a mortgage?

Your loan officer will scrutinize your credit report closely. They will look at credit scores. But they will also look at payment history, credit inquiries, credit utilization, and disputed accounts. They want to see a strong borrowing history where you’ve consistently paid back loans on time.

The loan officer will also look very closely at your income and asset documentation, to make sure you have enough cash flow to make monthly mortgage payments.

How do you know when your mortgage loan is approved?

Typically, your loan officer will call or email you once your loan is approved. Sometimes, your loan processor will pass along the good news.

What happens after a mortgage loan is approved?

There are generally two types of mortgage loan approvals: “conditional approval” and “final approval.” After your application is received, either your loan officer or the loan processor will contact you with any additional “conditions” that are required to get your loan fully approved. Once those conditions have been met, you’ll receive final approval.

How long does underwriting take?

Underwriting turn times can vary greatly depending on the institution. Many lenders will render an underwriting decision in as little as two or three days. But for some banks and credit unions, underwriting decisions can take a week or even longer.

How long does an appraisal take?

The actual property inspection conducted by the appraiser can take anywhere from 30 minutes to a few hours. The times vary according to the size and details of the home.

The full window — from the time an appraisal is requested by your lender, to when your lender receives the appraisal — is typically 7 to 10 days.

How much will borrowers pay in closing costs?

Closing costs include a variety of charges, like loan origination fees, appraisal fees, title fees, and other legal fees. You can expect closing costs to be around 2 percent to 5 percent of your loan amount.

Why would an underwriter deny a loan?

Underwriters may deny your loan for any number of reasons; some issues seemingly minor, and others more serious.

Some of the minor reasons for your loan being denied may be easily fixed, and you can get your loan process back on track quickly. These might include additional documentation verifying your income and employment, or a letter of explanation as to why you had a large withdrawal from a bank account.

Some reasons for mortgage denial might require you to make bigger changes before being approved for a loan. These include things like insufficient cash reserves, a low credit score, or high debt ratios.

Do underwriters deny loans often?

According to the Consumer Financial Protection Bureau (CFPB), nearly 11% of mortgage applications get denied. If you’re among that 11%, speak with your loan officer about what options you may have for getting your loan application approved in the future.

What credit score is required for a new home loan?

Credit requirements vary between lenders and loan types. Typically, FHA loans require a credit score of at least 580; conventional and VA loans require a score of at least 620; and USDA loans require a credit score of 640 or higher. But lenders often set their own requirements, which may be higher or lower.

If you’re considering homeownership within the next year or two, you should start working on your credit now. Pay your credit card and student loan payments on time and try to reduce the balances on your loans as much as possible.

Why do lenders charge mortgage insurance?

Mortgage insurance premiums help protect your lender in case you default on the loan. A foreclosure typically costs the lender as well as the borrower.

Conventional loans do not require mortgage insurance if you put down at least 20 percent, because this builds enough immediate equity in the home that the lender is already financially protected if the loan defaults.

Why do lenders set up escrow accounts?

A monthly mortgage payment often includes a home’s annual property taxes and homeowners insurance premiums. These parts of a monthly payment go into an escrow account maintained by your lender. Then, the lender pays these bills from the escrow funds.

Lenders and loan servicers provide this service because unpaid property taxes or homeowners insurance premiums could threaten the home’s value.

What are today’s mortgage rates?

Today’s mortgage rates are exceptionally low. However, rates vary a lot from one customer to the next. So it’s important to shop around and find your best deal.

See what you qualify for today.

Verify your new rate (Dec 3rd, 2020)

Step by Step Guide

First-Time Home Buyer