Loan Process
Purchasing a home is a major life event and being prepared for this step will go a long way in helping you make the right decisions. VIP Mortgage Group has provided a step-by-step guide to give you an overview of what you can expect as you go through the loan process. Read through each step and make mental notes to discuss with your VIP Mortgage Group representative. We'll answer your questions and guide you on your way to home ownership!
1. Pre-Qualification & Pre-Approval
The first step of your journey to owning a home is to check your current financial situation and credit-worthiness with a pre-qualification and pre-approval. These terms sound like the same thing, but they actually differ in their relevance in equipping you to enter into the loan process.
Pre-Qualification
Involves answering some basic questions from a lender regarding your overall financial status, including your income, assets, and debt liabilities. Based on the information that you provide, the lender can give you an estimate of how much of a loan you can expect to get. This can be done via a phone call or online form and usually involves no cost to the potential borrower. There are no official credit checks performed so this step usually goes quick, from one to three days to receive a pre-qualification letter. Because the financial information is provided by the borrower and not verified, pre-qualification doesn't carry a lot of weight in negotiations, but is a good first step to take with your lender to get a feel for where you stand in terms of how much house you can afford.
Pre-Approval
Following pre-qualification, getting pre-approved for a mortgage is a more involved process that requires actually filling out an application and providing your lender with detailed information pertaining to your financial situation. A full credit check with the 3 major credit bureaus will be run and depending on your lender, you may have to pay an application fee of several hundred dollars to commit to the loan process. Because the financial information provided is verified, you will receive a much more accurate loan approval amount and most likely an interest rate that you will be able to lock in. A pre-approval also carries substantial weight in the negotiation process as it signals to a seller that you are willing and able to buy the home once a price is agreed upon.
2. Mortgage Programs
Completion of the pre-qualification and pre-approval process with your lender will reveal much about your financial status and will lay the ground work for which type of mortgage will best suit your budget and financial goals. It may also present some options in the form of government assistance programs that may be available to you based on your credentials.
Fixed Rate Mortgages and Adjustable Rate Mortgages are Conventional Loans that present 2 different options to borrowers based on how long you plan on staying in your home and how much of a monthly payment your budget can handle.
If you're a First Time Home Buyer, an FHA Loan will help you afford a home with lower interest rates and a smaller down payment amount. If you've served in the military, a VA Loan offers the opportunity to buy a home with no down payment along with special interest rates. USDA Loans offer borrowers the opportunity to buy a home in designated rural areas with special terms without the requirement of being a farmer.
3. Shopping For Your House
Armed with your loan pre-approval and a grasp of the mortgage programs available to you, your shopping process can begin. The amount that you've been pre-approved for can serve as a ceiling for the price of the home you can afford. A great place to start your shopping is an online real estate website like Zillow or Trulia. These site have useful searching tools to filter results according to your search criteria and they can give you a good overall picture of what's available at a glance and how much house your money will buy you.
Finding a Licensed Real Estate Agent that you can trust is the best way to shop for your home. Sites like Zillow and Trulia don't always have the most up-to-date listings and their posted prices are not always accurate. Licensed Real Estate Agents have exclusive access to Multiple Listing Service (MLS) that reflect the most current inventory on the market. In addition, agents often know about properties that haven't yet been listed and may be able to give you an advantage over other buyers.
When you've found the house that checks all your boxes and is in your price range, it's time to make an offer to the seller. Your Real Estate Agent can provide valuable insight to making an offer based on comparable properties in the neighborhood as well as their own negotiating expertise. They will help you structure the offer with conditions that the seller needs to meet in order for the offer to stand. If accepted, a purchase agreement (or binding offer) is signed by the seller and buyer and it's time to finalize your loan.
4. Mortgage Application
Completing your mortgage application is when things really get rolling. Up until this point, it's all been preliminary qualifications and approvals, but now your financial information will get closely scrutinized, you'll have to provide a variety of documents to your lender, and the home you are buying will become part of the loan process as well.
All the information you entered on the application is verified against the source and any negative information is reviewed and requests for letters of explanation are presented to you for further investigation.
Required documents including W-2 forms, pay stubs, bank statements and more will be requested at this time to confirm the application information. For a complete list of documents that you'll need to prepare, click here.
Within 3 days of submitting your application, a Loan Estimate is produced. It states the loan terms such as interest rate and monthly payments, and details the closing costs associated with your loan.
An appraisal is also ordered to determine an accurate valuation of the property. As well as a title search to ensure there are no prior liens on the property.
5. Underwriting
With all the applications, documents and information submitted, the lending institution's underwriter is the final decision maker rendering judgement on whether or not the loan is to be approved. The underwriter specializes in cross-checking borrower credentials, credit history, property appraisal and program eligibility. Any red flags that come up during underwriting are brought to the borrower's attention at which time the loan is put into a state of suspense until the issue can be investigated and rectified. When the underwriter approves your loan, you are ready to move on to the closing. If your interest rate was not locked in before this point, it is set to the agreed upon rate and closing documents are drawn up. At this time, all offer conditions (any work that needed to be done to the house, etc.) that were agreed upon between the seller and buyer must be settled.
6. Closing
It's finally time to take ownership of your home! The closing documents are printed up and sent to title company office where you'll sit and sign your name more times than you ever thought possible. An important document to note during this step is the Closing Disclosure. It is similar to the Loan Estimate statement in Step 4 except instead of an estimate, it is a confirmed binding agreement to the terms of the loan. The Closing Disclosure and Loan Estimate should match. There is a three (3) day window prior to the closing meeting that the borrower is entitled to a full review of the closing documents. There are legal protections against the terms changing too much. Significant changes include:
The interest rate on your fixed rate loan changes by more than .125% or your adjustable rate loan changes by more than .25%
A prepayment penalty is added
There is a change of program or product (switch from a fixed rate to an adjustable rate) Any one of these changes would require the 3 days to reset as both parties review the change(s) and settle the discrepancies.
The borrower has the right to a Final Walk-Through of the property prior to the closing meeting to ensure that the seller has vacated the home and any repairs that were agreed upon have been made.
Prior to the closing meeting, your loan officer should inform you of how your closing costs will be settled, as well as any prepaid expenses (real estate taxes, homeowners insurance, etc). Often these expenses are rolled into the loan total, but it's a good idea to leave yourself some available funds in your checking account to cover and incidentals that may arise at closing.
Some other key documents to be aware of during the closing are:
Promissory Note A contract between lender and borrower stipulating the borrower's commitment to repay the loan and what happens if the terms are not met.
Deed of Trust Secures the Promissory Note and provides the lender with a claim against the property in the event of a contract breach.
Certificate of Occupancy For newly constructed homes, this document confirms that the home is suitable for living in.
When the closing meeting is finished, take care to store the documents in a safe place or perhaps ask a close friend or relative to keep them safe to prevent them from being lost during the confusion of the moving process.
You've completed a major step in your life and are beginning another significant chapter of owning a home. The team at VIP Mortgage Group hopes that you found this explanation helpful in understanding the mortgage loan process and we look forward to being there to guide you through each step you take.