Question

1. List the mortgage approval process from pre-approval through to the deed to the property

2. What is the Loan Processor role? Why is it significant to the Home Loan process? Who do they interact with and pass their findings to?

3. What is the Underwriter role? Why is it significant to the Home Loan process? Who do they interact with and pass their findings to? Why are they important to the loan process?

4. Discuss the important pieces of a "Loan Estimate?"

5. What are the components of verifying the borrower's information?

6. How does credit play into the loan approval process?

7. What is the difference between a variable and fixed interest rate for a home loan?

Answer 1

1. List the mortgage approval process from pre-approval through to the deed to the property

Shopping for a home may be exciting and fun, but serious homebuyers need to start the process in a lender's office, not at an open house. Most sellers expect buyers to have a pre-approval letter and will be more willing to negotiate with those who prove that they can obtain financing.

Potential buyers need five essential things—proof of assets and income, good credit, employment verification, and other documentation—to be pre-approved for a mortgage.

Pre-qualification vs. Pre-approval

A mortgage pre-qualification can be useful as an estimate of how much someone can afford to spend on a home, but a pre-approval is much more valuable. It means the lender has checked the potential buyer's credit and verified the documentation to approve a specific loan amount (the approval usually lasts for a particular period, such as 60 to 90 days).1

Potential buyers benefit in several ways by consulting with a lender and obtaining a pre-approval letter. First, they have an opportunity to discuss loan options and budgeting with the lender. Second, the lender will check the buyer's credit and unearth any problems. The homebuyer will also learn the maximum amount they can borrow, which will help set the price range.

Final loan approval occurs when the buyer has an appraisal done and the loan is applied to a property

5 Things You Need To Get A Mortgage Pre-Approved

Requirements for Pre-approval

To get pre-approved for a mortgage, you'll need five things—proof of assets and income, good credit, employment verification, and other types of documentation your lender may require. Here is a detailed look at what you need to know to assemble the information below and be ready for the pre-approval process:

1. Proof of Income

Buyers generally must produce W-2 wage statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses, and the two most recent years' tax returns.

2. Proof of Assets

The borrower needs bank statements and investment account statements to prove that they have funds for the down payment and closing costs, as well as cash reserves.

The down payment, expressed as a percentage of the selling price, varies by loan type. Most loans come with a requirement that the buyer purchase private mortgage insurance (PMI) or pay a mortgage insurance premium or a funding fee unless they are putting down at least 20% of the purchase price.3 In addition to the down payment, pre-approval is also based on the buyer's FICO credit score, debt-to-income ratio (DTI), and other factors, depending on the type of loan.

All but jumbo loans are conforming, meaning they conform to government-sponsored enterprise (Fannie Mae and Freddie Mac) guidelines. Some loans, such as HomeReady (Fannie Mae) and Home Possible (Freddie Mac), are designed for low- to moderate-income homebuyers or first-time buyers.

Veterans Affairs (VA) loans, which require no money down, are for U.S. veterans, service members, and not-remarried spouses. A buyer who receives money from a friend or relative to assist with the down payment may need a gift letter to prove that the funds are not a loan.6

3. Good Credit

Most lenders require a FICO score of 620 or higher to approve a conventional loan, and some even require that score for a Federal Housing Administration loan.7 Lenders typically reserve the lowest interest rates for customers with a credit score of 760 or higher.8 FHA guidelines allow approved borrowers with a score of 580 or higher to pay as little as 3.5% down.9

Those with lower scores must make a larger down payment. Lenders will often work with borrowers with a low or moderately low credit score and suggest ways to improve their score.

4. Employment Verification

Lenders want to make sure they lend only to borrowers with stable employment. A lender will not only want to see a buyer's pay stubs but also will likely call the employer to verify employment and salary. A lender may want to contact the previous employer if a buyer recently changed jobs.

Self-employed buyers will need to provide significant additional paperwork concerning their business and income. According to Fannie Mae, factors that go into approving a mortgage for a self-employed borrower include the stability of the borrower’s income, the location and nature of the borrower’s business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the payments on the mortgage.

Typically, self-employed borrowers need to produce at least the two most recent years' tax returns with all appropriate schedules.

5. Other Documentation

The lender will need to copy the borrower's driver's license and will need the borrower's Social Security number and signature, allowing the lender to pull a credit report. Be prepared at the pre-approval session and later to provide (as quickly as possible) any additional paperwork requested by the lender.2

The more cooperative you are, the smoother the mortgage process.

2. What is the Loan Processor role? Why is it significant to the Home Loan process? Who do they interact with and pass their findings to?

Loan Officers are allowed to issue pre-qualification after reviewing the following:

• Mortgage Loan Application
• Credit Report
• Credit Scores

Borrowers financials such as the following:

• two years tax returns
• two years W-2s
• most recent paycheck stubs
• 60 days of bank statements
• investment accounts
• other asset accounts
• divorce decree if applicable
• bankruptcy paperwork if applicable
• foreclosure paperwork if applicable
• child support paperwork if applicable
• other documents
• Once these documents are gathered, it gets assigned to a mortgage processor
• Role Of Mortgage Processor is to prep all documents in order and make sure there is no pages missing to submit to underwriting for a pre-approval
• The role of mortgage processor and loan processing is the gathering and packaging of all paperwork submitted by borrowers in a timely manner

Role Of Mortgage Processor is to make sure everything is in order and get it prepped up to be submitted to the underwriting department for a conditional approval with as little conditions as possible.

3. What is the Underwriter role? Why is it significant to the Home Loan process? Who do they interact with and pass their findings to? Why are they important to the loan process?

An underwriter is the party that assesses and evaluates the risk of whatever their particular field has (mortgage, loan, health policy, investment, etc.) and whether or not it is worth it for their company to assume that risk.

Underwriters are most common in environments that most consistently bring risk with them. If you as an individual are dealing with an underwriter, you're likely dealing with a major deal in your life - trying to get insurance for a major purchase, trying to get a specific health insurance or loan, etc. Each risky industry has their own underwriter with a firm understanding of the specialized knowledge of that field, as well as a general knowledge of finance.

Using the specifics of the field, an underwriter will use relevant information to determine if the inherent risk is worth it and how it should impact the deal, should it go through at all.

Say you are an underwriter for a health insurance company trying to determine whether to approve of offering someone an insurance policy or what their specific coverage should be. You would look into relevant information like their age, past medical history and family history. Using this information, among others, they can input everything into an underwriting software that will help determine what premium should be offered - or, if it's deemed too risky, to not offer them a policy.

The specific information varies based on the claim. Naturally an underwriter for a health insurance company looks into medical history; an underwriter assessing the risk of a car loan will likely look at your credit score and history, among other things.

Being an underwriter can mean walking a fine line. They can't give out loans or policies to parties with too much risk since it's their employer that will be taking on that risk, but the degree of riskiness that is acceptable, and what they can be given based on their specific riskiness, is what the underwriter has to determine. Can the party you're giving this loan to realistically pay you back - and if so, at what rate?

Each new case has its own set of details that must be assessed, especially in fields with more complex policies. A simple medical history will make determining the risk of a health insurance policy simple, but finding out all the intricacies of a workers' compensation case means having to find a lot of information before a decision can be made.

Some cases are very simple and don't require too much analysis and research. Even in these cases, though, underwriters are still needed to help walk people through the loan and be available in case sudden extenuating circumstances change the situation.

4. Discuss the important pieces of a "Loan Estimate?"

The Loan Estimate tells you important details about the loan you have requested. The lender must provide you a Loan Estimate within three business days of receiving your application.  

The Loan Estimate is a form that took effect on Oct. 3, 2015.

The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the form indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). If your loan has a negative amortization feature, it appears in the description of the loan product.

The form uses clear language and design to help you better understand the terms of the mortgage loan you've applied for. All lenders are required to use the same standard Loan Estimate form. This makes it easier for you to compare mortgage loans so that you can choose the one that is right for you.

When you receive a Loan Estimate, the lender has not yet approved or denied your loan application. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward. If you decide to move forward, the lender will ask you for additional financial information.

5. What are the components of verifying the borrower's information?

Borrowers seeking a mortgage to purchase or refinance a home must be approved by a lender in order to get their loan. Banks need to verify the borrower's financial information and may require a proof or verification of deposit (POD/VOD) form to be completed and sent to the borrower's bank. A proof of deposit may require the borrower to furnish at least two months of bank statements to the mortgage lender.

Banks and mortgage lenders underwrite loans based on a variety of criteria including income, assets, savings, and a borrower's creditworthiness. When buying a home, the mortgage lender may ask the borrower for proof of deposit. The lender needs to verify that the funds required for the home purchase have been accumulated in a bank account and accessible to the lender.

A proof of deposit is evidence that money has been deposited or has accumulated in a bank account. A mortgage company or lender uses a proof of deposit to determine if the borrower has saved enough money for the down payment on the home they're looking to purchase.

For example, in a typical mortgage, a borrower might put 20% down towards the purchase of a home. If it's a $100,000 home, the borrower would have to put down $20,000 upfront. The mortgage lender would use a proof of deposit to verify that the borrower actually has a $20,000 in their bank account for the down payment. Also, the lender will need to ensure adequate funds are available to pay the closing costs associated with a new mortgage. Closing costs are additional costs that can include appraisal fees, taxes, title searches, title insurance, and deed-recording fees.

The borrower typically provides the bank or mortgage company two of the most recent bank statements in which the company will contact the borrower's bank to verify the information.

Types of Financial Information Verified

A lender that submits a VOD form to a bank receives confirmation of the loan applicant’s financial information. Although the requirements can vary from bank-to-bank, some of the most common types of information required when verifying bank statements include:

• Account number
• Account type, such as a checking, savings, individual retirement account (IRA), or certificate of deposit (CD)
• Open or closed status and open date
• Account holder names, which are the authorized signers on the account
• Balance information, including current balance as well as average balance history over the last two statement periods
• Current interest rate (if applicable) as well as interest paid over the two most recent statement periods
• Account closed date and the balance at the close (if applicable)
• If it's a savings or a certificate of deposit, the bank may ask for the length of the term, interest rate, interest paid, and any early withdrawal penalties

A lender may refuse to finance a mortgage or allow the potential buyer to use the funds from the account for the purposes of the mortgage and closing costs if the financial information doesn't adequately satisfy the verification requirements.

6. How does credit play into the loan approval process?

Step 1: Mortgage Pre-Approval

You can think of pre-approval as a kind of financial pre-screening. It has “pre” in the name because it happens on the front end of the mortgage loan approval process, before you start shopping for a home.

Pre-approval is when a lender reviews your financial situation (particularly your income, assets and debts) to determine if you’re a good candidate for a loan. They’ll also tell you how much they are willing to lend to you, and provide you with a pre-approval letter to that effect. The lender might also check your credit reports and scores at this stage.

This a beneficial step in the mortgage approval process, because it allows you to narrow your home search. If you were to skip the pre-approval and go straight into the house-hunting process, you might end up wasting time by looking at homes that are above your price range.

Step 2: House Hunting and Purchase Agreement

Once you’ve been pre-approved for a certain amount, you can shop more confidently within that price range. And that brings you to the second major step in the mortgage approval process — house hunting.

We’ve written extensively about the house hunting process. Here are some house hunting tips geared toward first-time home buyers in particular.

Your mortgage lender isn’t heavily involved at this stage. The house hunting work is primarily done by the buyers and their real estate agents.

But the lender does come back into the picture once you’ve made an offer to buy a home. That’s when you move into the next step of the mortgage approval process — filling out an application.

Step 3: Mortgage Loan Application

You’ve been pre-approved for a loan. You’ve found a home that meets your needs, and you’ve made an offer to buy it. The seller has accepted your offer. Now it’s time for the next stage of the mortgage approval process, and that’s the loan application.

This is a straightforward step in the process, because most lenders use the same standardized form. They use the Uniform Residential Loan Application (URLA), also known as Fannie Mae form 1003. The application asks for information about the property being purchased, the type of loan being used, as well as information about you, the borrower.

You can find a sample loan application online: just do a Google search for “Fannie Mae form 1003.”

Step 4: Mortgage Processing

Once you have a purchase agreement and a completed loan application, your file will move into the processing stage. This is another important step in the broader mortgage loan approval process.

Loan processors collect a variety of documents relating to you, the borrower, as well as the property being purchased. They will review the file to ensure it contains all of the documents needed for the underwriting process (step 5 below). These documents include bank statements, tax records, employment letters, the purchase agreement, and more.

The loan processor may also:

• order credit reports (if this hasn’t been done already),
• begin verifying income, assets and employment, and
• order a home appraisal to determine the value of the property.

The exact steps performed by the loan processor can vary slightly from one company to the next. It also varies based on the type of mortgage loan being used. But this is usually how it works. After this, you’ll move into one of the most critical steps during the mortgage approval process — underwriting.

Step 5: Mortgage Underwriting

Underwriting is where the “rubber meets the road,” when it comes to loan approval. It is the underwriter’s job to closely examine all of the loan documentation prepared by the loan processor, to make sure it complies with lending requirements and guidelines.

The underwriter is the key decision-maker during the mortgage approval process. This individual (or team of individuals) has authority to reject the loan if it doesn’t meet certain pre-established criteria. The underwriter will double-check to ensure both the property and the borrower match the eligibility requirements for the specific mortgage product or program being used.

The underwriter’s primary responsibility is to evaluate the level of risk associated with your loan. He or she will review your credit history, your debt-to-income ratio, your assets, and other elements of your financial picture to predict your ability to make your mortgage payments.

Mortgage underwriters focus on the “three C’s” of underwriting — capacity, credit and collateral:

• Capacity — Do you have the financial resources and means to repay your debts, including the mortgage loan? To answer this question, they’ll look at your income history and your total debts.
• Credit — Do you have a good history of repaying your debts, as evidenced by your credit reports and scores?
• Collateral — Does the property serve as sufficient collateral for the loan, based on its current market value? The underwriter will use the home appraisal report to determine this.

If the underwriter encounters issues during this review process, he or she might give the borrower a list of conditions that need to be resolved. This is known as a conditional approval. A common example of a “condition” is when an underwriter asks for a letter of explanation relating to a particular bank deposit or withdrawal.

If the issues discovered are minor in nature, and the borrower(s) can resolve them in a timely manner, then the mortgage loan can move forward and eventually result in approval. However, if the underwriter discovers a serious issue that is outside the eligibility parameters for the loan, it might be rejected outright. Some borrowers sail through the underwriting process with no issues whatsoever. It varies.

Underwriting is arguably the most important step in the mortgage approval process, because it determines whether or not the loan is ultimately approved. You can learn more about the process here.

Step 6: Mortgage Loan Approval and Closing

If the mortgage underwriter is satisfied that the borrower and the property being purchased meet all guidelines and requirements, he will label it “clear to close.” This means all requirements have been met, and the loan can be funded. Technically speaking, this is the final step in the mortgage approval process, though there is one more step before the deal is done — and that’s closing.

Prior to closing, all of the supporting documentation (or “loan docs,” as they are called) are sent to the title company that has been chosen to handle the closing. And there are a lot of documents. The home buyers and sellers must then review and sign all of the pertinent documents, so the funds can be disbursed. This happens at the “closing” or settlement.

In some states, the buyer and seller can close separately by setting up individual appointments with the title or escrow company. In other states, the buyers and sellers sit at the same table to sign documents. The procedure can vary depending on where you live. You can ask your real estate agent or loan officer how it works in your area.

Prior to closing, borrowers should receive a Closing Disclosure. This is a standardized five-page form that gives you finalized details about the mortgage loan. It includes the loan terms, your projected monthly payments, and the amount you will need to pay in fees and other closing costs.

7. What is the difference between a variable and fixed interest rate for a home loan?

Variable Interest Rate Loans

A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change. The interest charged on a variable interest rate loan is linked to an underlying benchmark or index, such as the federal funds rate.

As a result, your payments will vary as well (as long as your payments are blended with principal and interest). You can find variable interest rates in mortgages, credit cards, personal loans, derivatives, and corporate bonds.

Fixed Interest Rate Loans

Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for that loan's entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan.

When a loan is fixed for its entire term, it remains at the then-prevailing market interest rate, plus or minus a spread that is unique to the borrower. Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate.

Depending on the terms of your agreement, your interest rate on the new loan will stay the same, even if interest rates climb to higher levels. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan. As interest rates fall, so will the interest rate on your loan.