Understanding the Loan Process
Many people describe the mortgage lending process as a tangled maze, difficult to navigate. Years ago this may have been true, however the process of securing a loan is becoming more and more simple. The following is an introduction to the institutions that lend money to consumers for real estate, the process of securing a loan, and some basic information on how lenders decide whether to lend and at what rates
Brokers versus Bankers - Product Selection
Some mortgage sources are direct lenders such as banks and mortgage bankers with retail establishments. Usually banks or mortgage banks will be competitive in one or several products, and will encourage their sales agents to sell these products to the consumer. Many times banks will be less competitive in rate, and instead try to fill a niche, such as quick approvals or flexible underwriting (easier approval) of loans. The trend is clearly away from working directly with lenders and towards the brokerage or ``multi-lender platform."
Brokers or multi-lender platforms represent a number of lenders and offer these lenders' products through a wholesale arrangement. The lender will then compensate the broker when they deliver a loan to them. Many banks that offer retail or wholesale loans will allow brokers to be more competitive than the retail side of the same bank. This is happening increasingly as brokers are moving their services to the Internet and reducing their costs of distributing loans to the consumer.
Brokers versus Bankers - Service
Direct lenders are in a way captive to their own products. They are limited in their selection and thus in their advice. Brokers on the other hand can sell a variety of products, from multiple sources, and can be objective in their recommendations.
If you walk into your local bank, S&L, or retail mortgage bank they'll usually take your application there, perhaps underwrite your loan there, and lend their own money. If your loan is declined or if the rate is unacceptable, you will need to begin the process again with another source. With a multi lender source, you have multiple chances if one lender does not approve your loan.
The Application Process
Whether you deal directly with a bank, apply for your loan on the Internet, or work with a broker, all lenders require the same application. The form is standardized and known as the "1003" which is the Fannie Mae designation for this comprehensive form.
The lender will want to verify certain information about the borrower(s) and will require additional information on the property. The process includes verification of income, employment, assets, and credit history. Some of this information will be provided by the borrower. For example, you will be requested to provide copies of W-2 forms for 2 years, several recent pay stubs, and bank statements. Other information, such as your credit history, will be obtained directly from the credit bureaus.
The lender will require an appraisal and a legal description of the property, such as a title report. Certain lenders will work with certain appraisal companies, so if you have an old appraisal it may not necessarily be accepted by the new lender. For some programs, other inspections of the property are required.
The Lock Process
Sometime before your loan documents are drawn, you will "lock in" a rate for your loan with the mortgage source. The purpose of the lock is to allow you a loan at the "locked-in" rate if the loan closes before the lock period expires, even if rates are higher at the time of funding. Most multi-lender sources give you the choice of when to lock. Typically the shorter the time period between your lock and the actual closing the cheaper the interest rate or points.
The Approval Process
During the "processing" and/or "underwriting" period, your credit, assets, income and other determinants are checked and compiled. At the end, your loan is either approved with conditions or approved without conditions or declined. Sometimes a loan is labeled suspended which is another way of saying that the lender requires more information to decide.
Conditions are further documentation that the lender requires in order to finalize your loan. Many borrowers become frustrated by conditions that surface at the end of a loan transaction and can't understand why they are being raised so late. This is because the loan may go through several review processes prior to actual funding, and the final conditions are added, sometimes as late as after the loan documents have been signed. Just work with the lender and remember, the process is not perfect and the lender is simply trying to meet conditions imposed by other sources on them. Since most loans these days are sold and serviced by other parties, the lender must verify that the loan will be salable upon close. Whether or not you are serviced by your original mortgage lender or a new party shouldn't matter, your payment will simply be made to the new institution. Generally other terms of your loan can not be changed after you have signed your final loan documents.
When all conditions are met, your loan documents are drawn and forwarded to the place of settlement or closing, usually a title company office.
TIP:Do not make any adverse changes to your financial "picture" during this delicate time between approval and when funds are dispersed. Believing the "approval" is the final stage or that the lender won't find out about the change in debt or income or other factors can lead to real headaches. Innocent mistakes range from applying for a new department store credit card, to transferring a balance to a low-rate card, to purchasing a refrigerator for the new house, to quitting a job to go full time into a new business. These changes will at least force an explanation to the lender and at worst may cause your loan not to fund and the approval to be withdrawn. Often a lender obtains another credit report and calls your employer one last time before funding the loan.