Today, I’ll go over the entire mortgage process from start to finish. If you’ve never had a home loan or never purchased a home, you should go through this to know what to expect from the first time you reach out to a mortgage lender to the very last day when you sign and take ownership of the property.
I’ll cover all the tiny details that might be surprising if you’ve never done it before. In the end, you will be fully prepared.
The Mortgage Process
The mortgage loan process is simple if you’ve been through it before. Essentially, it has three stages: the pre-approval stage, the underwriting stage and the closing stage. These are the three phases of every home loan. If you’ve never been through it before, they might sound daunting. Hence, we will break them down and tell you what to expect in each of the three phases.
The Pre-approval Stage
This is the first stage in the mortgage process. Whenever you go out and want to buy a house or a condo, you’ll need to get pre-approved, especially in a market like the one we are in, a seller’s market. The sellers will need to know that you are qualified even to make an offer as opposed to just some random guy off the street saying he wants to buy a house for a million dollars. It’s disappointing if after they turn everybody else down, they find out that he doesn’t have any money or access to funds. That’s why we have a pre-approval process. If you’re working with a real estate agent, which I highly recommend, then you will probably be asked to get pre-approved by your realtor before they even start showing you properties.
So what does the pre-approval process look like? As a lender, if someone calls me and says they want to buy a house, I will ask a few questions right off the bat over the phone. I would ask what they do for a living and how much their salary is. The critical parts of a loan are knowing what your down payment is and your debt and income situation. That’s going to give us kind of a picture of what you can afford.
Your interest rate (what rate you get on the house) depends on your credit score, so that’s a less important piece of the puzzle because your interest rate can fluctuate a little. However, as long as you meet the minimum criteria, you’ll get pre-approved, assuming you have the income and the debt. Hence, we will ask what kind of money you have for your down payment and closing costs.
If you’ve never bought a house before, know that closing costs can be anywhere from $8,000 – $20,000. I’ve covered everything you need to know about closing costs in another article. I broke it down line-by-line for you, and you can find the article here. However, for the sake of this video, know that there’s such a thing as closing costs.
Concerning the down payments, we’ll want to know if you are buying with 3% or 3.5% down or a 20% more conventional loan. We also want to know about the cash you have on hand. Is it in the bank, stocks, or are you getting it from a family member? All these options are totally fine; we want to know if we have to move the money around or need a letter verifying the gift. These are the loose ends to tie up for your down payment and closing costs.
As mentioned earlier, we’re also interested in your income situation. Are you a w2 or are you self-employed? We’ll look at your income and determine how much you make per month gross (before taxes). This will help us determine how much you can realistically afford on a monthly payment. Hence, we’re going to look at your principal and interest on the loan cost.
Also, if you’ve never owned a house before, we’ll look at your property tax bill. We want to know what that will be if we break it down monthly and what the homeowner’s insurance, essentially your fire hazard kind of insurance, will cost. These four things: Principal, Interest, Tax and Insurance (PITI), will be your monthly cost for the house. We’ll take that against what you earn and see if it make sense. For example, suppose you have a bunch of student loans that you’re paying off and car payments and credit cards, and after you pay all these monthly obligations, you only have a thousand bucks left to your name from your job. In that case, chances are you probably can’t qualify on your own for a house.
Hence, the pre-approval process is interested in your financial information. We typically run your credit to make sure we get the debts accurate because some people don’t know exactly how much they pay. By running your credit, we’ll see what you owe in writing.
Once we figure out how much you can afford per month, we use it to gauge the kind of house that fits your finances. For example, you and your spouse make this much together, you have this much debt, which means you can afford a $700,000 house. That’s all going to be part of that pre-approval process.
After we look at those numbers, we’ll give you a letter called a pre-approval letter from a lender. It has my name on it, my NMLS number, phone number, and email as a lender. If the other selling party wants to call and double verify, it must have all this information. Now you can go out shopping. Again, the pre-approval process is the first part of the process. This process is essential to prove to the seller that you qualify for the loan and help you know what to expect in terms of what you can afford. You don’t want to look at homes outside of your price range; that’s just going to break your heart.
If you don’t go through the pre-approval stage first, you’ll fall in love with a house and find out that you cannot afford it when you want to make an offer. Conversely, if you think all you can afford is a $300,000 condo, it might turn out that you really can afford a $500,000 single-family home. You don’t want to waste your time looking at the small condos since you can afford something nicer. This is the first part of the pre-approval process.
There’s also another part of buying a house where you’re shopping for the home. I won’t go over that since that’s more about you and your realtor just going to open houses, figuring out what your property will be or which one you like. This is the part where you consider your preferences; for example, if you want to be in a school district or you want a pool in your house.
As soon as you have an accepted offer (an offer you’ve written up and the seller has accepted), it’s a residential purchase agreement called an RPA. It’s countersigned, so both you and the seller have signed the RPA; now, you can go to town and start the second part of the loan process, which is the full underwriting.
The Full Underwriting Process
When you have that RPA signed and that house under contract, we take that contract and your loan application. Your loan application contains essential information, e.g. what you do for a living, your social security number and all the other stuff we gathered for the pre-approval. We also take your credit report and your supporting documentation. Now is when we’re going to need all of your supporting documentation. If you’re a w2 employee, these are things like your pay stubs; we need 30 days worth of pay stubs. If you get paid twice a month, it’s usually two pay stubs. If you are a self-employed person, we’ll usually need one or two years of taxes plus bank statements. There are different things we need for your income.
If there are other things on your credit report that need explaining, for example, if you own other properties (chances are you don’t since this is your first time buying a property), we would need proof of those expenses. If you have a student loan that it’s deferred, but you know how much it will cost a month, we might need a letter from your student loan. Your loan broker or your lender will tell you what kind of documentation you need.
Generally speaking, we’re always going to need a Photo ID, proof of income, e.g. a w2 and pay stubs or tax returns. We’ll also need proof of funds. Hence, if you’re using money in a savings or a checking account for your down payment, we’ll need a bank statement showing that the funds are there. These are the big things on a purchase, and we send all the information to an actual person known as an Underwriter. This person looks over all the documentation. For example, they might be looking through your bank statement and say, “Hey. Yes, they have $200,000 in their bank account to afford this million-dollar house. However, the $200,000 was just transferred yesterday from a source we don’t know. We need to know where this money came from and make sure it’s not a drug money laundering thing.” They want a paper trail or explanations for the numbers that do not add up.
They double-check the numbers we put in the loan application and ask questions. The questions come back as conditions for the loan. The underwriting process starts reviewing all the documentation, and they make an initial ruling usually within a couple of days, whether you’re denied or conditionally approved. When we say conditionally approved, it’s just th3at we have conditions. A very common condition for employees is to verify their employment. Sometimes, they do it verbally by calling your employer. Sometimes they need written verification of employment, and they’ll email or fax or call your employer and tell them what they need to fill out, or they’ll ask me as the loan broker to have my processor fill something out. There can be different conditions.
This is when the loan is actually happening. The loan officially starts when you have that purchase agreement and when we go right into underwriting. We register and lock the rate, and we go into underwriting. Typically, from start to finish, once we submit the loan to the lender, we want to close it in 30 days, especially on a purchase. Sometimes, in a seller’s market, they’re going to want to close faster, so if you get a seller who asks if you can close in 17 days or 20 days, talk to your lender and know if that’s realistic.
You don’t want someone holding a gun to your head saying you promised to close in 20 days, and since you’re not, they’ll keep your deposit. You don’t want to get into one of those angry matches. You want to know comfortably from your lender how long you need to close the loan and they should be able to tell you based on what kind of documentation you give them. Self-employed borrowers will always be a little more complex than borrowers who are w2 because the latter is a much simpler process.
For the underwriting process, your conditions sometimes can take two days, and you’ll be clear. If your employer is the kind of person that doesn’t call back, or if you’re self-employed and you need tax transcripts, and it’s that time of the year where the IRS is just really slow at getting tax transcripts, it could take three and a half weeks for you to get that condition of approval cleared off your loan. This is what takes the longest time in terms of the loan processes.
One big condition that’s not under your control or even your employers or the IRS is the Appraisal. Well over 90% of purchases require an appraisal and what that means is that typically, an appraiser goes out to inspect the home, takes pictures, makes measurements, and then writes up a 20-50 page report saying the house is worth a certain amount. They do this for the bank to make sure you’re not overpaying for the home because if you say the house is worth 500 and the appraiser says it’s only worth 400, the bank will not loan you money based on what you think is worth. It will lend you money based on what the appraiser says it’s worth.
The problem with an appraisal that comes in lower than expected is that you have to make up for that gap. If you were planning on putting in 20% on a $500,000 house, and it comes back as only being worth $400,000, that $100,000 difference will be on you. Hence, appraisals are the scariest and most trepidatious part of the loan process. They’re also some of the most time-consuming.
Right now, appraisers are overworked. As soon as your loan is registered, you can order the appraisal, and typically your lender will order it, but they’re going to need your credit card to pay for it. The appraisal in the inspection should be the only cash outlay that you’re risking in a purchase, and it could be anywhere from $500 – $1,000. It depends on the area and how big the property is. Hence, as soon as the loan is registered, your lender should ask you for a credit card or even send you a direct link for an invoice to get that appraisal started.
You want to start that as soon as possible because it can be delayed for several reasons. The seller might not answer the phone or might not be available. They might have difficulty finding an appraiser if your house is in a more rural area. These are some of the reasons you want to get on that right away.
Contingencies in a Home Purchase
There are usually two contingencies in a home purchase. There’s a loan contingency and an appraisal contingency. A loan contingency says to your seller, “I agree to buy this house for this much money, contingent upon the lender saying I can have the money”. An appraisal contingency says,” I agree to buy the house for this price, contingent upon it appraising for what or more I am willing to buy it for”. Your contingencies have time limits, so typically, a loan will have a 14-day contingency, and an appraisal will have about a 17-day contingency in today’s market.
These could be asked to be waived. If it’s a seller’s market and they have twenty offers on the house, they might come back to you and tell you that they like your offer, but you need to waive the appraisal contingency because they have a cash buyer who doesn’t even need it as he’s not getting a loan. Now, that’s a conversation for you to have with your lender or realtor on a case-by-case basis because that could be a little chancy. So be careful when people ask you to waive either the loan or the appraisal contingencies with real ramifications. Essentially, what’s at risk is your earnest money deposit.
What do I mean by your earnest money deposit? When you make the offer, you’re going to open escrow and title as the loan is going on and usually, the seller dictates which escrow and title company you’re going to use. This is the company that makes sure that nobody else owns the house. The title makes sure that there are no loans against the home that you don’t know about, and the escrow makes sure that the title is clear and that the house is there and that the money is there.
They’re a neutral third party, and they verify that funds and title are available before releasing it to each party. They get their money and you get your house, and both parties are good to go. Again, the escrow company ensures everybody’s money and the title are in. The title makes sure that the house is clean of lies or other owners claiming that they have a piece of the title. All of these get opened right when you start the loan process, and to begin that, usually, you have to put in an EMD (earnest money deposit). It’s 1% – 3% of the house’s purchase price, so if it’s a $500,000 house, it might be $15,000 that you’re putting directly into escrow.
Your earnest money deposit lets your seller know you’re serious because you’ve put money in. Once you wave your contingencies, technically speaking, you can lose your earnest money deposit if you decide not to move forward. This is a big can of worms because there are ways to get out of owing the earnest money deposit, and there are things called a notice to perform. However, once you remove your contingencies, the real risk is, “Am I going to lose my deposit if the loan doesn’t go through or if the appraisal doesn’t go through or whatever?
If you decide to pull out before the contingencies are up, you can get your earnest money deposit back. You have to cancel the contract, talk to your realtor about your reason, and usually work it out that you get your earnest money deposit back. You will not get your appraisal fees so that $500, $2000 or $1200 fee on the appraisal is burned; the inspection fees are burned. However, you don’t have to risk that 3%-ish kind of deposit.
The Closing Process
Once your loan contingency is done and your appraisal contingency is gone, and your lender says you can remove the loan contingency because the appraisal came in at value, you’re good to go. It’s just a matter of the lender saying you’re clear to close, and once you get clear to close, it’s just about coordinating signing dates.
You may be told something like, “you’re good to close on Thursday; we need the rest of the money for your down payment wired into escrow before then”. They’re going to prepare the documents and then usually a mobile notary will come to you, and you’ll sign about 4,000 pieces of paper. Just kidding, not 4,000, but it’s a lot. If you’ve never bought a house before, it’s almost an entire paper rim.
There are different things saying, “Hey, this is your loan; you’re responsible for it”. This is not surprising as you are borrowing several hundred thousand dollars to buy a house and you need to sign away saying that you know that they can come after you if you default in payment. Hence, you need to sign a lot of documentation, and the notary goes through it. Typically, a signing will take anywhere from 45 – 60min, and they’re going to want your IDs. Again, they’ll go over some of the paperwork and you sign it. Once you sign that, then record it. Usually, on the same day or the next day, you exchange keys and that’s it. That’s the entire process from start to finish.
As a recap, your pre-qualification process on the loan starts way before you ever make an offer. That’s what you do to start shopping for a loan. Then you go into the underwriting process, where the underwriter reviews all your documentation and starts asking questions about anything that might come up. In addition to that, you’ll begin your appraisal; you’ll wire in your earnest money deposit and wait to see how the appraisal comes in.
Suppose there’s anything weird on the loan that the lender needs from you in terms of additional documentation; it’s typically within 30 days. In that case, the appraisal will get cleared of your loan contingency. Your lender will tell you you can remove that and get ready for signing. Before signing, you’ll wire in the rest of the money to escrow, and then you start counting your date, sign with the notary, own the house, and make your first payment a little over a month later.
This is the entire process from start to finish. Some questions might come up during the thing, but those are the big kind of key takeaway moments.
Now, if you’ve never bought a house before, it’s essential to know how to read a loan estimate because that’s how to make sure that there are no hidden fees in your loan. WIth your loan estimate, you get an accurate idea of closing costs. I recommend that you go through my explanation about loan estimates; especially reading it and comparing it with others, while also determining if the loan you’re being offered is the best deal for you.