Imagine this: you are a lender starting out in the U.S. mortgage business or a new home buyer has contacted you. The first question that comes to mind: “What are the must-know mortgage loan processing steps?”
Is the budget finalized? Has the loan been pre-approved? These are some questions that you need to ask homebuyers, to begin with.
Homebuying should be an exciting experience for your clients. Unfortunately, the numerous mortgage loan process steps they will experience can overwhelm them.
This blog offers a step-by-step guide on the various mortgage loan processing steps. As a lender, it can help you ask the right questions and prepare for each of the mortgage loan process steps. You may also share this with homebuyers and facilitate a smooth mortgage loan application and home buying process.
What Are the Steps of Mortgage Loan Process?
If you are a lender, help homebuyers to understand these steps in the U.S. mortgage loan process. Collaborate with them and make the process smooth sailing.
Decide A Budget
Before you start explaining various steps of the mortgage process to homebuyers, help them set an ideal budget. A budget will let homebuyers have realistic expectations with regards to searching for homes and shortlisting a mortgage loan lender.
To set a budget, ask homebuyers to set a monthly installment they can easily afford. It will be easier than trying to fix a random price limit for purchasing a home. Once the installment amount is determined, you can help them work backwards to calculate the mortgage interest rates.
It is important to calculate mortgage interest as even one percent change can lead to a difference of tens of thousands of dollars to the overall home buying budget. Likewise, real estate property taxes can also affect the budget. These taxes can differ in some neighbourhoods or even in cities across your region. Inform your buyer about including the homeowner’s insurance premium in the monthly installment amount.
Accounting for all ongoing housing costs will help you determine a realistic monthly installment amount. If the buyer considers their savings, it will give them a clear idea of the amount they have in hand for down payments and the closing process.
Get Pre-Approved for Mortgage Loan
Once you’ve completed the budget estimation, guide homebuyers on the first step of the mortgage process.
Real estate agents require a mortgage pre-approval letter before buyers can purchase a home. This letter has the recommendation of the amount buyers can borrow based on their income and credit score. Ideally, a buyer should have this letter before they put down an offer on a house. You can provide a pre-approval letter to buyers and confirm their eligibility to apply for a mortgage loan.
At this stage, buyers may get confused between a pre-qualification and pre-approval letter—they’re different. Help them understand, while both letters indicate a lender’s willingness to give buyers a loan, pre-approval letters are necessary to determine their borrowing eligibility. A pre-approval letter is vetted against a buyer’s credit score, income proof, bank statement, etc.
Search Homes and Make an Offer
Before moving on to the next mortgage loan processing step, it is time that your client looks for a house. Once a home is shortlisted, they must make an offer. You could collaborate with a real estate agent who will help structure the purchase offer and highlight all contingencies that must be fulfilled ahead of the deal closure.
Once the offer is made, help your buyers to submit earnest money—an amount they need to deposit to confirm the home purchase. It can typically range between $500 to 5% of the total purchase price.
Ideally, you should disclose the amount of earnest money to buyers in advance. Especially where the market is competitive.
Apply For Mortgage Loan
The third step in mortgage processing procedure is loan application. Although most of the mortgage application process is covered in the pre-approval step, you will need to ask buyers for a few more documents.
These documents include a fully executed purchase agreement, earnest deposit receipt, updated income and liabilities statement and asset summary. This process may be a tad difficult for business owners. It will be mandatory to submit tax returns.
Applicants with disabilities or those who receive social security income will have to submit relevant supporting documents to you.
Once buyers submit the documents, calculate their debt-to-income ratio. This ratio will help you determine the buyer’s ability to pay out monthly installments. Subsequently, you will have to share a loan estimate with details of the exact amount, interest rate and home loan terms to be offered to the client.
Mortgage Underwriting
The fourth mortgage process step is underwriting. Guide the buyers to wait out this period.
Review their credit reports, title search and tax transcripts during this period. Subsequently, verify documents such as the loan application form and bank statements along with payment history.
To ensure a smooth underwriting process, ask buyers to comply with and promptly respond to any queries you may have. At this stage, you will also have to ask them to share written explanations for issues related to delayed payments or collections.
After the application is fully processed, relay it to the underwriter to review buyer details. Once the review is completed, the underwriter will highlight any errors or missing information in the application.
The underwriter scrutinizes the loan application to assess three main criteria as follows:
Will the buyer be able to pay the monthly mortgage installments after deducting existing debts from income?
Does the buyer pay debts on time? (Credit history verification)
Is the value of the buyer’s collateral aligned with the loan amount in case of a payment default?
Mortgage Closing
The final but most important mortgage process step is closing— relay the closing document to a closing attorney with detailed instructions about preparing the file.
Subsequently, the attorney will send the file to your client for signatures. This is followed by a loan disclosure document which confirms the expected costs shared in the loan estimate document.
If everything is aligned, the buyer can sign all the documents.
We hope that this blog comprehensively answers the question: What are the steps of mortgage loan process?
We understand that the mortgage loan process can be complicated and time consuming. You are expected to strike the perfect balance between managing timelines, ensuring compliance, performing verifications and maintaining your bottom line.
HelioNext can help you streamline mortgage loan processing operations. Benefit from seamless loan auditing services, reduced loan processing timelines and enhanced loan processing efficiency.
Our tech-led mortgage loan processing solutions will help you offer an unparalleled home buying experience to your clients.