We now know the 4 steps to getting a mortgage pre-approval so how about we look at the 8 steps to a successful mortgage closing? Whether you are making a home purchase or refinancing the process is pretty similar from the mortgage side of things. There may be certain steps on a home purchase that would be done on the real estate side of things, such as a home inspection, but we will focus on the mortgage related steps for the purpose of this post.
Step 1: Loan Program Confirmation
The pre-approval process is there to ensure that your loan officer believes you can get approved for a mortgage based on the information they have available. The pre-approval is not necessarily the point in the process where the loan program is finalized.
The first step in getting the process started in the right direction is to confirm and finalize the loan program being used to finance the home. Maybe you were pre-approved for both FHA and Conventional financing. Maybe you were considering a 5% down payment or a 10% down payment. Now that the property is selected and the process is started the loan program should be finalized so that the mortgage company can properly document your loan file to meet all the particular requirements of the program being selected.
Step 2: Lock or Float Interest Rate
With a purchase a closing date is set and you know when you will close, if all goes as planned. Refinances are not a set but the lender should know the estimated time from needed to process and close your mortgage transaction. This is important because without a known closing date it can be difficult to lock.
When you lock your interest rate you secure that rate for a period of time. You are securing the rate from any market fluctuations (up or down). Because of the lock only being in place for a set period of time you need to know when you will close to lock your interest rate in long enough to secure that rate through closing.
You do not have to lock, however. You can choose to float your rate. Floating is what it sounds like – your rate is not secured and will rise and fall with the market until you choose to lock. Deciding whether to lock or float will be a decision you will need to make with the guidance of your loan officer.
Step 3: Pre-Underwrite
The name of this step is not very important but within our team we take this step very seriously which is why we call it a pre-underwrite. During this step your loan is being reviewed for the documentation needed to obtain a loan approval through underwriting. The documents received during the pre-approval process are reviewed for any potential concerns the underwriter might find and need addressed. If you have been out shopping for a few months some of the documents (pay check stubs, bank statements, etc.) may be outdated and need to be updated.
Different mortgage companies, teams, loan officers have processes that may differ on this step. In some cases the loan officer does this while on other teams the processor might. Within our team the processor completes this step. Once reviewed (our goal is within 1-2 business days) you will be notified of what documents are needed for underwriting.
Step 4: Underwriting
Underwriting sounds scary. The result can sound even scarier. After an underwriter reviews your loan file to ensure you have met all of the requirements and guidelines for the loan program selected you will, generally, receive a conditional loan approval. Scary, right? Conditional? Why is it conditional?
Conditional loan approval is a very normal step in the process and occurs on the majority of files submitted to underwriting. The conditional part of the approval refers to anything needed to finalize the loan approval. This could be an appraisal. Or an explanation on a deposit that appears on your bank statement. Or an internal condition such as updating the status within an internal company tracking system. Just know a conditional loan approval is part of the normal process.
Step 5: Appraisal
Steps 4 and 5 may be interchanged depending on your situation. In some cases your loan file may go to underwriting prior to an appraisal being ordered. In other situations the appraisal is ordered first.
The appraisal is the assessment of the home being financed to determine value. The appraisal is not intended for you. Instead it is for the lender to assess whether the collateral is sufficient to provide you the debt. In other words, the appraised value needs to be at or above the mortgage amount being provided so that if you were to stop paying and the property was foreclosed upon the mortgage company would be able to sell the home to recoup the funds necessary to pay off the mortgage debt.
Appraisals are, typically, ordered through third party companies called Appraisal Management Companies (AMCs). The reason for this is to meet a Federal law that prohibits the lender from being too involved in the appraisal process that could falsely skew the value.
Step 6: Final Approval
Once the appraisal is in and all conditions have been gathered your loan is resubmitted to underwriting to be reviewed and final approved. Assuming all of the conditions have been met and the appraisal is accurately completed your loan will receive a final loan approval. The final loan approval indicates that you have met all of the requirements necessary to receive the mortgage financing.
Step 7: Final Figures
With a final loan approval in place we can now prepare your mortgage for closing. Most mortgage companies have a Closing Department that works with the Title Company to prepare the mortgage and real estate figures (fees, costs, etc.) so you know what amount of money, if any, to closing to finalize the transaction. Once this is completed you will be provided with a Closing Disclosure to show the exact amount of money needed at closing along with all the finalized mortgage and real estate numbers several days prior to closing.
Step 8: Closing
Closing is the time to celebrate. The hard work is done and your goal has been met. At closing you will sign all the final documents securing the mortgage debt and, in the case of a purchase, transferring the ownership to you. Although this can be an exciting day, it is a very important day for you to review what you are signing and make sure you understand what you are agreeing to. Ask questions if you are unsure of what is being signed.
This process may sound daunting, overwhelming, or scary but with the right team (loan officer, real estate agent, title company, etc.) in place this process can feel relatively stress-free.