This guide is about understanding mortgage application process to avoid delays. Despite the countless mortgage lending guidelines, applying for a mortgage application has become much easier than a few years ago. Homebuyers with prior bad credit, prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, and a short sale can now qualify for home loans.
Many home buyers do not realize they can qualify for an FHA loan with only a 3.5% down payment requirement and 580 credit score.
Mortgage lenders do require income and want to see borrowers have the ability to repay (QM) their mortgage. They like to see job stability and the likelihood that their employment will continue for the next three years. In the following paragraphs, we will cover understanding mortgage application process to avoid delays.
Understanding Mortgage Application Process from Application to Closing
For first-time home buyers, applying for a mortgage may seem like an endless task, with the mortgage lender asking them dozens of questions and documentation. Borrowers should take time to understanding mortgage application process.
Be prepared to be asked many questions and provide documents and letters of explanation before and during the mortgage application process.
Understanding Mortgage Application Process is crucial for borrowers to avoid stress during the mortgage process. Understanding mortgage application process makes borrowers understand why mortgage processors and underwriters ask for certain conditions.
Every Lender Has a Different Mortgage Application Process
Whether dealing with a local bank, credit union, mortgage banker, or mortgage broker, they will ask borrowers the same questions. Not knowing what happens once a mortgage application is submitted adds stress to the home-buying experience. For some, the toughest step is obtaining pre-approval. Unfortunately, the process does not stop there.
Much work still lies ahead. Lenders need to confirm your income, debts, assets, and credit, verify employment, and review the debt, property, title, insurance, and closing documents.
Their main objective is determining whether borrowers can repay the mortgage loan and afford the mortgage payments and other monthly expenses. Not all lenders have the same mortgage process. Some lenders may have loan officers issue pre-approval letters in a few hours. Other lenders will take a week for a pre-approval letter because all their pre-approvals are TBD Property Underwriting Approvals.
The Importance of Complete Legible Documents
All lenders will need to see documented income, liabilities, and assets. Two years of tax returns, two years of W-2s, and 60 days of bank statements are mandatory.
Know the mortgage application process, identify delays, and prepare proper documentation to speed up home loan approval at Gustan Cho Associates.
Any irregular deposits need to be sourced. For borrowers with prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale, all documentation about these needs to be provided. Divorce decrees, child support payments, and alimony payments all need to be provided as all pages of the payment agreements. Rental verification may be required.
Examples of Incomplete and Illegible Documents That Cause Delays
Most delays stem from incomplete, outdated, or unreadable document requests. Examples include a missing bank statement, a new credit inquiry, an unexpected deposit, a delayed appraisal, or a last-minute job change.
The good news is that most delays can be avoided by understanding what the lender is reviewing and responding quickly to documentation requests.
The mortgage application process is designed to confirm that the borrower, property, and loan all meet program guidelines. The CFPB states that mortgage disclosures such as the Loan Estimate and Closing Disclosure provide borrowers with an overview of the loan, including its terms and costs.
What Is Involved in the Mortgage Application Process?
The mortgage application process begins after you give a lender information about yourself, your finances, your job, and the property you want to buy. From there, the loan moves through processing, underwriting, appraisal, and title review before final approval and closing.
The answer to the question “What is the purpose of the mortgage application process?” is fairly straightforward. The lender needs to know that you are a qualified borrower and that the property is eligible for the mortgage loan.
As described in Fannie Mae’s Selling Guide, mortgage origination involves the loan application package, borrower eligibility, underwriting, property review, and insurance and closing documents.
What Makes the Process Feel So Complicated?
The process can feel complicated because several people may work on your file at the same time. Those people may include your loan officer, processor, underwriter, and appraiser, as well as the title company, your agents, and possibly your attorney. If one person is delayed, the entire file could be delayed. For example, your income may have been approved, but the appraisal is still outstanding. Your credit may meet mortgage guidelines, but the title company may need to clear a lien. Your assets may meet the requirement, but the underwriter may need an explanation for the deposit.
Why You Need to Stay Engaged
Don’t assume you’re done once you’ve finished submitting your mortgage files. The process will go much smoother if you stay engaged.
Check emails, answer calls, and upload any requested documents. Never make financial decisions without consulting your mortgage professionals first.
Small mistakes can have a big impact. If the underwriter requests one page from your bank statement, don’t send just that one page. You must send the entire bank statement, including the blank pages.
Step 1: Getting Pre-Approved
Before house hunting, you must first obtain a strong pre-approval. This means going beyond a short credit check and allowing the lender to evaluate your income, credit, assets, and debts. You will also need to answer questions about your employment history and the loan you want.
Pre-Qualification vs Pre-Approval
Most pre-qualifications are a very rough estimate based on the information you submitted. Pre-approvals are stronger and require a more in-depth review of documents. Because of this in-depth review, most sellers and real estate agents will take a pre-approval more seriously.
Documents Required for Pre-Approval
Most borrowers will need their most recent pay stubs and W-2s. You may also need to submit bank statements and tax returns. Be ready to provide a copy of your photo ID and give the lender permission to pull your credit.
If you are self-employed, the lender may also require business tax returns and a profit-and-loss statement. You will also need to submit bank statements if your loan program requires them.
If you have a bankruptcy, a foreclosure, a history of late payments, a collection account, a high debt-to-income ratio, or non-traditional income, you may face more scrutiny before an offer is made.
Step 2: The Mortgage Application
You have to give a lot of personal and financial information to make a formal mortgage application. This includes your full legal name, SSN, income, employment, assets, debts, the address of the property, the purchase price, the loan amount, and other required information. The lender prepares disclosures and officially starts the loan review process. Make sure your application is accurate. Problems may occur if you list the wrong income amounts, omit debts, use erroneous employment dates, or give an incomplete address.
The Role of Accuracy
Discrepancies in the application may require the lender to request additional information. Mortgage lenders perform thorough verifications and may review your application alongside pay stubs, tax returns, W-2s, credit reports, bank statements, and employment verifications. If you are unsure about something, do not guess. For example, if your income is not consistent from month to month, tell the lender in advance. You should also disclose a side business or a recent employment change, as the underwriter will find this information if you do not.
Loan Estimate Review
In response to your mortgage application, you will receive a Loan Estimate. It contains key loan details, including the loan amount, monthly payment, rate, estimated closing costs, and estimated cash to close. The CFPB advises you to review it and verify that the mortgage terms match those discussed with the lender. Don’t let anything take you by surprise just days from closing. If you think something is fishy, don’t be afraid to ask questions.
Step 3: Loan Processing and Document Review
Processing begins after the loan application is submitted. A loan processor organizes your paperwork, addresses document deficiencies, and orders services to be completed.
What the Processor Reviews
The processor will review documented income, bank statements, credited loan conditions and explanations, the purchase contract, insurance, and the appraisal. You will be contacted if any documents are missing.
There are many delays caused by the borrower’s neglect to submit the documents requested by the lender. Avoid delays by submitting documents in the requested format.
The lender may prefer a PDF of a bank statement over a screenshot. The lender may also prefer bank statements themselves rather than copies.
Common Processing Delays
A bank statement may be missing pages. A pay stub may show no year-to-date income. A tax return may be unsigned. A blurred or cut-off image may be delivered. Any of these will prevent the processor from advancing the file, causing frustration. The best rule is to send exactly what the lender asks for.
Step 4: Underwriting Review
During underwriting, the lender renders a qualitative judgment about the loan. The underwriter examines the borrower, the collateral, and the loan program guidelines. The underwriter may approve the file, suspend it to request additional information, or deny it.
What Underwriters Look For
Underwriters examine the credit risk of the mortgage loan. They consider the credit profile, income stability, debt-to-income ratio, assets and reserves, employment and housing histories, and the financed property. They also verify the file against FHA, VA, USDA, conventional, jumbo, and non-QM guidelines. Underwriting is more than the credit score. A borrower may have a credit score that meets the threshold, but may still need to explain recent delinquencies, overdrafts, large cash deposits, employment gaps, and disputed accounts.
Conditional Approval
Most borrowers receive a conditional approval. This means the loan cannot be fully cleared to close, but the underwriter will approve it once certain conditions are met. These may include new payroll check stubs and bank statement pages, letters of explanation, proof of earnest money, homeowners’ insurance, title corrections, appraisal items, and verification of employment.
Step 5: Appraisal, Title, and Insurance
The mortgage application process includes a review of the property. The lender needs to ensure the home is acceptable collateral for the loan, which usually includes an appraisal, a title search, and proof of homeowners’ insurance.
Appraisal Review
The appraisal provides an opinion of value and notes the property’s condition. If the home appraises at or above the purchase price and there are no significant repair issues, the process can continue without delays. Repair issues or a low appraisal can delay closing. Loans with government involvement, such as the FHA, VA, and USDA loans, have property condition stipulations. For those loans, the required repairs must be completed, and the property reappraised prior to closing.
Title Review
The title company must examine the history of ownership, liens, judgments, unpaid taxes, legal descriptions, and all matters pertaining to the title. Should an old lien or title issue arise, it cannot be resolved until after closing. Additionally, there can be title delays, even if the borrower has done nothing to cause them, such as a prior owner’s unresolved issue that comes up during the title search. That is why title work should be ordered as soon as possible.
Homeowners Insurance
To avoid delays in closing, the borrower must provide proof of homeowners Insurance. Shop for insurance early, especially in areas with higher insurance costs, to avoid delays in closing.
Step 6: Clearing Conditions
One way to prevent delays in the mortgage process is to clear conditions. Conditions are items, some of which are borrower conditions, that the lender requires before granting final approval.
Borrowing Conditions
Borrower Conditions can include recent pay stubs, bank statements, explanations, and proof of bank deposits, credit inquiries, gifts, rent verification, and large deposits. These conditions are likely within your control. None of the conditions should be taken lightly. Rarely, if ever, will the underwriter be able to provide you with final approval if the item requested is not supplied, even if the item requested seems to be trivial.
Third Party Conditions
Third parties can include the appraiser, the title company, the insurance agent, your employer, an IRS transcript, the condo association, your attorney, and your Realtor. These items can be even more time-consuming since you are not the only one who is providing the information. This is why your mortgage team must communicate well. If a third party is not prompt in providing the information, your team must be able to follow up.
Step 7: Closing Disclosure and Final Approval
The lender will provide a final draft, called the Closing Disclosure, prior to loan closing. The final Disclosure will include a final loan summary and a breakdown of each loan’s closing costs. The loan closing costs will include a breakdown of cash to close. The Closing Disclosure must be provided at least 3 business days prior to a scheduled loan closing. This provides you with the opportunity to review the final loan terms and ask any final questions.
Review of the Closing Disclosure
The Closing Disclosure must be reviewed to ensure that the final loan terms match the negotiated loan terms. This includes your personal information, the property address, the Loan Type, the loan term, the interest rate, the monthly payment, the closing costs, Cash to Close, Escrow, and prepaid costs. If any of these terms differ from expectations, the mortgage team must be notified immediately.
Clear to Close
Clear to close signifies that the lender has completed the underwriting review and cleared the final conditions. After the file is clear to close, the closing department will coordinate with the title company and prepare the final documents. Clear to close is one of the final steps, but borrowers need to continue to avoid changes. As a reminder to borrowers, do not open new credit or move large amounts of money before closing. Do not change jobs or make large unexplained deposits before closing.
Providing Documents Immediately After Conditional Loan Approval
If a lender requests rental verification, the only way it can be proven is by providing 12 months of canceled checks that have been paid to the landlord. If the mortgage loan applicant has been paying his or her landlord cash, rental verification cannot be used. Renters leasing their home from a registered property management company can have the property manager complete and sign a VOR Form instead of providing the lender with 12 months of canceled checks or bank statements.
Understanding Mortgage Application Process: Questions Lenders Often Ask
What Is Payment Shock?
Here is a case scenario on payment shock: If the renter can provide rental verification that they are currently paying $1,000 per month, the new proposed housing payment on a new home will be $1,100. The home buyer will have a very small payment shock because the new proposed mortgage payment is only 10% higher than the current rent payment.
If living rent-free with a family member and the new proposed housing payment is $1,100, the home buyer will have a significant payment shock because they go from zero to $1,100 monthly.
Borrowers do not have to have been employed for two years straight. Borrowers can have gaps in employment. Lenders require borrowers to provide a two-year employment history and overall employment history. College and trade schools can count toward work history as long as transcripts can be provided.
Understand the Mortgage Application Process Before Delays Happen
A smooth mortgage starts with complete documents, stable credit, verified income, and clear expectations. Get a simple roadmap so you know what happens from application to closing.How Do Underwriters Look at Credit and Credit Payment History
Borrowers’ overall credit history will be reviewed, and each derogatory account will be reviewed. Having prior bad credit and getting a mortgage loan approval is alright. Everyone has had a period of bad credit throughout their lives due to unemployment, business loss, divorce, or other extenuating circumstances. Isolated incidents of periods of bad credit are understandable, as are bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. However, mortgage lenders like to see borrowers have re-established credit after a period of bad credit.
The Importance of Timely Payments in the Past 12 Months
Almost all mortgage lenders like to see borrower paying their bills timely for the past 12 months. Recent multiple late payments can be a problem. One or two late payments in the past 12 months are not necessarily deal killers. Borrowers with a long history of bad credit and late payments will have issues. Derogatory credit over an extended period without extenuating circumstances shows disregard for credit. Credit scores are extremely important because it dictates whether borrowers qualify for a particular mortgage program. Credit scores always dictate mortgage rates.
Debt-To-Income Ratio
The debt-to-income ratio is one of the most important factors in the mortgage application process. Conventional mortgage loan programs have a cap of 50% debt-to-income ratios. There are no front-end debt-to-income ratio requirements on conventional loans. The front-end debt-to-income ratio is the housing ratio. FHA has a 46.9% front-end debt-to-income ratio cap and a 56.9% back-end debt-to-income ratio.
Assets and Reserves
Mortgage lenders will require 60 days of bank statements. Any irregular deposits need to be sourced. Mortgage underwriters will want enough funds for the down payment and closing costs. If there are not enough funds for closing, then gift funds may be accepted from a family member.
Mortgage lenders do not like to see any bank overdrafts in the past 12 months. Bank overdrafts are one of the most negative things for borrowers.
Some lenders will deny a mortgage loan application even with one bank overdraft in the past 12 months. One or two overdrafts are not a deal killer, with some lenders with a good letter of explanation. There should be no reason for delays or stress during the mortgage process. Remember the days the mortgage closing can get delayed due to lenders closing on federal holidays.
Common Reasons for Delays in Getting a Mortgage
Most mortgage delays are avoidable. By learning about the common causes of delays, borrowers can avoid the same issues.
Missing Information or Documents
This is a common reason for delays. Sometimes, lenders need a full bank statement, but only the first page is sent. Sometimes, a signer of a document is sent an unsigned copy, and the document is outdated when requested to be provided within the last 30 days.
Obtaining New Credit During the Loan Process
Delays can happen during the approval process if new credit is opened. New loans, new credit cards, new furniture accounts or personal loans, and credit inquiries can alter the debt-to-income ratio and require a revised underwriting process.
Large Deposits Without a Source
It is common for large or unusual deposits to require additional documentation of the source. Payroll deposits are confirmed with little documentation. Cash deposits, transfers, gifts, and business deposits or transfers are subject to additional documentation.
Changing Jobs or Changing Income
Changing jobs or the type of income (such as from salaried to commission, from W-2 to 1099, or from full-time to part-time) can delay closing. Some job changes can be verified by the lender, but a new position often is not.
Appraisal and Title Issues
Issues such as a low appraisal, a required repair, a missing title document, an unpaid lien, or a problem with ownership can delay a closing. Most of these problems can take a long time to fix, as they often require 3rd parties.
Not Responding Quickly
The importance of a fast response cannot be overstated. A condition that can be cleared in one day can delay the closing by a week if the borrower does not respond promptly. It is very important to check your email regularly and respond to requests promptly throughout the process.
How to Prevent Delay Issues During Closing
The best way to close a mortgage as quickly as possible is to not cause any unexpected issues. Closing a mortgage with unexpected issues is very tedious for the lender, as they will constantly review the file throughout the closing process.
Maintain Financial Consistency
New accounts, closed accounts, or large purchases all require communication with your lender. The best option until the loan process is complete is to avoid changes to your finances.
Respond with All Requested Documentation
Documentation must be complete and provided in full. Bank statements are required in full with all referenced pages. The lender may ask for a signed document with the signature and date. Be sure to include both.
Be Transparent About Credit or Income Issues
Late payments or collections, job stability or self-employment… these and any other issues or concerns… can lead the mortgage team to quickly close your file. A great mortgage team strives to mitigate issues, and if informed honestly and quickly, can close your file.
Don’t Assume
Don’t assume any new credit card, job change, or deposit is fine. Always ask first. A five-minute phone call can save you hours of delays.
Choose a Lender Who Is Familiar With Complex Files
Some borrowers do not have simple files. Gustan Cho Associates works with borrowers with recent credit events, high debt-to-income ratios, non-traditional income, manual underwriting, and previous denials. We help borrowers who require FHA, VA, conventional, jumbo, non-QM, and manual underwriting, and help those who do not fit other lenders’ boxes.
Understanding Mortgage Applications
Understanding the mortgage application process can save you, the borrower, from the stress of derailing it with last-minute surprises after closing has been scheduled. Mortgage approvals are not based on a single number or document. It is based on the complete file of the borrower, the property, income, credit, assets, the appraisal, and the lender’s guidelines.
The most you can do to help the process is prepare, tell the truth, respond in a timely manner, and do not make any financial changes prior to closing.
The more information a lender requests, the less likely it is that a problem has been found. Typically, it’s because the underwriter requires the file to be documented in a specific way to support the request for final approval. Gustan Cho Associates helps you, the borrower, understand the mortgage application process, what to expect during it, and the post-underwriting steps. The more prepared you are, the more likely you are to close on time.
Frequently Asked Questions Surrounding the Mortgage Application Process
Does a Change in Employment Affect the Mortgage Approval Lag?
Yes, changing employment can delay the approval process for your mortgage. The lender will need to confirm your new employment and associated income. The process can be easier if there is minimal change between your old and new employment, for example, moving within the same field or earning a similar income level. However, it can be trickier if your employment transitioned from full-time to part-time or from salaried to commissioned (or vice versa). Finally, it can be trickier if your new employment is going from one that pays via W-2 to one that pays via 1099. You should consult your loan officer before changing employment if you have a mortgage application in process.
Is it Wise to Cancel Debts While Waiting for the Mortgage?
It is unwise to cancel debts while waiting for the mortgage unless commanded by the loan officer. Perhaps canceling the debts is wise in some cases; however, it can cause documentation issues due to cash fluctuations and reduce the cash available for closing. The lender should analyze your entire financial situation before advising whether canceling debts is prudent.
Why Does the Lender Repeatedly Request the Same Information?
The lender may repeatedly ask for the same information because the previous copy is incomplete, outdated, blurred, missing pages, or does not meet the underwriter’s requirements. There are specific requirements regarding the dates and formats of mortgage-related documents. Sending a clean and complete PDF can curb the repeated requests.
What Happens if an Appraisal is Late?
If an appraisal is late, the mortgage might still close, but the closing date is likely to be moved. An appraisal must be completed and reviewed for an underwriter to issue an approval and for a mortgage to close. Appraisals may require additional steps if they value the property below the purchase price or if it requires corrective repairs.
Is a Loan Guaranteed After a Borrower is Pre-Approved?
No. Pre-approval does not guarantee a borrower a loan. Pre-approval is only an initial assessment, and the underwriter must review additional documentation, the appraisal, and complete a title and insurance assignment. Major events impacting a borrower’s income, credit, or employment prior to closing also affect approval.
Will a Large Deposit Negatively Impact Your Application?
Yes. An appraisal can require a large deposit to be substantiated. An underwriter may require additional documentation to explain a large deposit, and cash deposits can be more difficult to verify. Borrowers should speak with their loan officer if they plan to deposit large cash amounts during the mortgage process.
How Early Should I Begin Preparing for a Mortgage Application?
Consider preparing for your mortgage application at least 60 to 90 days in advance. You will want to make sure you are reviewing your credit, getting all required paperwork in order, and ensuring there is no unnecessary debt on your credit report leading up to your offer on your target home. You will also want to give yourself time to reduce expenses and address any personal gaps in credit and savings that you feel you will be judged for in your offer. Self-employed applicants, applicants who have reported credit deficits, or individuals who have been denied for a live mortgage, may want to start preparing even earlier.
