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 with the advent of Web lending services the process of
securing a loan is becoming more and more simple. The following article is an
introduction to the
institutions that lend money to consumers for real estate, the process of
securing a loan, along with some basic information on how lenders decide
whether or not to lend to a borrower and his/her property.
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 not
even necessarily try to be competitive in rate, but will instead try to
fill a niche, such as quick approvals or flexible underwriting (easier
approval) of loans. Going directly to the bank or source was probably the
way that your parents obtained their home loan, but the trend is clearly
away from such direct establishments towards the brokerage or ``multi-lender
platform'' as brokers are now being called on the Web.
multi-lender platforms represent a number of lenders and
offer these lender's products through a wholesale arrangement. The lender
will then compensate the broker when they deliver a loan to them and this
compensation is invisible to the borrower. Many banks that offer retail or
wholesale loans will allow the broker to charge up to 1% of the loan amount
for their compensation. By reducing this 1% fee, a broker can in fact be
more competitive than the retail side of the same bank. This is happening
more and more as brokers are moving their services to the Internet and
reducing their costs of distributing loans to the consumer.
brokers on the Internet can be the most competitive source
for mortgage loans available. However, be wary of multi-lender sites that
limit their choice of lenders to less than 10 sources. Many such sites are
charging the bank to participate and can not offer unbiased selection as
they are captive to their lending sources.
Bankers - Service
Direct lenders are captive to their own products.
That is, they will not provide unbiased advice nor selection, since by doing
so they will possibly risk losing your loan to the company whose product truly
provides you the most value. Brokers on the other hand can sell a variety of
products, from multiple sources, and can be objective in their recommendations. The
compensation provided from one lender is equal to that from another lender,
therefore the outcome of the recommendation doesn't matter. What does
matter is giving you the best loan for your needs.
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 for whatever reason, you
will need to begin the process again with another source. With a multi
lender source, you have another chance if one lender doesn't approve your
For simplicity's sake, we'll describe the overall process that is common
to all loan applications regardless of the source of funds.
The Application Process
Whether you walk into a bank, you apply for
your loan on the Internet,
or a mortgage officer meets you in your home, all lenders require an actual
application. The form is standardized and known as the ``1003'' which is the
Fannie Mae designation for this form.
The lender will want to verify certain
information about the borrower(s)
and will require additional information on the property. Borrower
information will include verification of income and employment, assets, and
credit history of the applicants. Some of this information will be provided
by you, the applicant, as part of your application process. For example,
you will be requested to provide copies of W-2 forms for 2 years, pay
stubs, and bank statements for asset verification. Other information, such
as your credit history, will be obtained directly from the credit bureaus
even if you have a current credit report on hand. The lenders will always
verify this information independently.
For the property itself, the lender
will order 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. Even if the loan is to
be made with a relatively large down payment, the lender still wants the
property appraised. In the case of a purchase, other inspections may also
be done, but are separate from the appraisal for the loan.
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 labelled suspended which while
sounding harsh, is simply another way of saying that the lender requires
more information to decide. Don't be alarmed if your loan is suspended,
this is not necessarily a step towards being declined. Usually you can
submit additional documents and turn a suspension into an approval.
are further documentation or checks that the lender needs to
finalize your loan before funds can be dispersed. 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 on 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. No other terms of your loan can be changed
after you have signed your final loan documents.
When all conditions are
met, your loan documents are drawn up and
forwarded to the place of settlement or closing. You sign everything and in
some states the lender reviews the package one last time
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 purchasing a refrigerator for the new house, to buying two
new Mercedes Benz sedans, to quitting a job to go full time into a new
business. These changes will at least force an explanation to be given 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.
Simultaneous to funds being dispersed,
an instrument is recorded at the
county recorders office to give the lender security to your property. This
last step varies from state to state.
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. This
could be offered at the application, upon approval, or anywhere in between.
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. To read more about E-Loan's lock
To summarize,there are many ways to approach your home financing process
beginning with the source that you choose to borrow from. The advantages of
working with a broker or multi-lender platform on the Web are substantial
and account for the shift away from banks and direct lenders. Understanding
the loan process can minimize the liklihood of frustration during the loan
transaction. Remember to work with a source that has established
a company with integrity that cares for the borrower throughout the
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