The Mortgage Pre-approval Process
Many lenders have a different take on what the pre-approval process should include, or when they feel comfortable issuing a pre-approval letter. Some lenders are willing to just discuss your information over the phone and issue a pre-approval letter, which some may think is great since it's so easy, but there is quite a bit more to getting pre-approved then just having a verbal conversation about how things should look. In today’s market, attempting to see properties prior to becoming pre-approved just won’t happen. As Real Estate Agents are paid only after the sale occurs AND successfully closes, Seasoned Real Estate Agents operate their businesses extremely efficiently. We don’t show properties without knowing the parameters of the client’s affordability factor.
Mortgage applicants should know that there is a difference between being "pre-qualified" and being "preapproved.” The process is very tedious as the mortgage guidelines are mandated by the government. "Pre-qualified" is an ambiguous term that is used to provide the Homebuyer a false sense of security to engage in a mortgage transaction without the loan officer doing their proper due diligence. It's a copout for the explanation that should have been: "Based on the verbal information you sound good; however, before you make an offer we need to verify everything we went over which will include a credit check, reviewing income & asset documentation, and if needed, even verifying employment directly with your employer."
In a perfect world, the steps should actually go like:
1. Meet with a loan officer (this can be face to face or over the phone, NOT solely done via email). Too much can be lost in the process as much information has to be learned by the borrower.
2. Loan officer will explain the process to the Homebuyer, what will be done at each milestone, when out of pocket costs should be expected
3. Loan officer and Homebuyer will verbally discuss the Homebuyer’s situation, including financials, credit and any special circumstances the Homebuyer is in (like getting gift funds, starting a new job in a new area, past employment, etc.)
4. By working with the loan officer, “live,” the loan officer will have them complete an application, run a credit check, and do an initial profile of Homebuyer’s credit worthiness. The loan, nor the rate, is locked until there is an official contract with all terms agreed upon. The loan officer has to have the contract in writing; it cannot be a verbal discussion of what the contract is “going” to be.
5. Homebuyer will provide loan officer documents the loan officer needs (paycheck stubs, W-2's, tax returns, bank statements, letters of explanation)
6. Loan officer reviews documents and contacts employers for any further required verification (for example averaging overtime, commissions, etc. and clarifying start dates if employment has been less than 2 years), including running the loan through the automated underwriting system (be it FHA, VA or conventional).
7. Loan officer issues a pre-approval letter letting the Homebuyer know they are pre-approved for a certain amount.
8. Homebuyer makes an offer. Once mutual terms are agreed upon and a BINDING AGREEMENT DATE is placed on the contract, the rate can be locked. Rates CANNOT be locked until a contract is in place, accepted by both the Homebuyer and the Seller.
9. Homebuyer or their real estate agent provides loan officer copy of contract terms
10. Loan officer/processing staff generates the loan application/disclosures for the Homebuyer to sign/initial/date/return to the loan officer to process for further validation of all documents that borrower has submitted.
11. Loan officer re-runs actual terms/conditions through automated underwriting again
12. Loan is sent to underwriting (sometimes the title report needs to come in, sometimes the appraisal needs to come in. The title report is ordered immediately, the appraisal can be ordered once you receive the application/disclosures)
13. Underwriting reviews all documents and usually additional documents (called "conditions" or “stips”) are required, such as evidence of homeowners insurance, small items on the appraisal corrected (if needed), amongst a laundry list of possibilities (brace yourself for the underwriter to ask for small items so it doesn't come as a surprise, sometimes it isn't much at all, sometimes it can be a bit)
**it is imperative that the borrower’s response for requests by the loan officer and/or their staff is immediate so that there is no delay in closing date and time.
14. Conditions are sent in to underwriter and reviewed and final loan approval is issued
15. Loan officer informs Homebuyer when documents can be prepared and delivered to title/escrow officer or closing attorney ("closing agent" is the generic term) for the closing (usually no more than 2 days from final approval)
16. Closing agent prepares the final settlement statement for lender approval, lender approves, Homebuyer goes in to sign final loan documents in front of a notary and in this local market, an attorney or closing processor will explain all of the documents generated by the mortgage company, as dictated and mandated by the government.
17. Depending on the state you are buying in, it may fund/record the day you sign or there could be a few day period after you sign before it funds & records (rule of thumb is if you are east of the Rocky Mountains it's the same day, west of the Rocky Mountains usually there is a couple day delay - but vice versa can certainly be arranged ahead of time). See how in the above process a majority of the processing/verifications were taken care of prior to the Homebuyer going under contract on the home, and not before? It cuts down on the "your paperwork didn't come over in the correct format and this is delaying your closing date" type of excuses. That is the way to properly handle a purchase transaction. If you want to know what steps your lender is taking to insure your pre-approval is solid, just ask. They shouldn't mind telling you and it'll give you both a chance to feel more comfortable with the mortgage transaction process.