I’m new to the home buying process but am looking at purchasing my first home. What exactly happens from start to finish during a loan transaction?
Great question. It’s very important to know the different steps of the loan process to make sure things run more efficiently and to give the borrower peace of mind as they enter into this major financial decision. Below is a quick step by step process for a typical mortgage loan transaction. Obviously, sometimes other circumstances can come up that may alter some things, but for the most part, this is a typical scenario.
- Pre-approval – This is typically the best place for potential homeowners to begin. They buyer will reach out to a mortgage professional to see what types of loan programs fit their needs and what they may qualify for. Typically, this involves having the borrower’s credit score checked, along with some income and asset verification. From there, the loan originator can determine what loan products the buyer qualifies for and what product would best suit their needs.
- Offer – Once pre-approved, a buyer can begin shopping for homes that suit their liking and needs. Having a real estate agent representing the buyer can be very helpful and beneficial to the buyer because they have knowledge of the market and what’s available, they can help the buyer in determining a reasonable offer to extend to a seller and will be crucial in the negotiation process.
- Contract – When the buyer extends an offer to purchase to the seller, and the offer is accepted (sometimes after some negotiation), both parties enter into a legal and binding contract.
- Application/loan processing – When a contract is finalized, the buyer can then begin the application and processing portion of the loan process. During this time, a full application is completed, and all required disclosures will be signed. This is typically when the interest rate is locked in for this transaction (if the borrower chooses to lock at this time). Supporting documentation, such as paystubs, tax returns, W2s, bank statements and any other required documents are collected and verified during the processing portion. The appraisal would be ordered at this time and title work for the property would be requested. Once all of these things are collected, the loan moves to underwriting.
- Underwriting – Once all supporting documents are in order, the entire loan file is sent to an underwriter. The underwriter goes through the file “with a fine-toothed comb” ensuring everything about the loan fits program and investor guidelines. The underwriter scrutinizes the income documentation, bank statements, appraisal, title work, and anything else about the file that needs to be examined. Their job is to ensure, to the best of their ability, that the potential borrower has the ability to repay the loan. Typically, after going through the file, they will come back with approval conditions that have to be satisfied prior to final approval (this could potentially happen a couple of times if additional information is required). This can be anything from additional paystubs or income verification to appraisal revisions. When all conditions are satisfied, we move to our clear to close. Almost there!
- Closing – Once the clear to close is received, it is time to get everyone to the closing table. At closing, all the final loan documents will be signed, any down payment or funds to close will be required, and the property will officially change owners.
This may seem like an overwhelming and confusing process, and it can be if you don’t have the right people working for you. Having a good realtor and loan originator can mean the difference between a smooth, easy transaction to get you into your first home or a super stressful nightmare. Understanding the process and having a good team on your side can make for a great home buying experience!