Buying a new home is exciting, but it comes with a big responsibility: paying for it. For most homebuyers, that means going through the mortgage process. There are multiple steps involved in applying for a home loan and getting approved, but don’t worry if you’re not familiar with the process. You’ll be guided by experts like your real estate agent, loan officer, or real estate attorney at every step of the way.
From preapproval all the way to closing, here’s a comprehensive overview of the steps involved in the mortgage process.
How does the mortgage loan process work?
There are several distinct stages in the mortgage loan process:
- Mortgage prequalification
- Mortgage preapproval
- Mortgage application
- Home appraisal and underwriting
- Mortgage closing
Mortgage process flow chart
|Prequalification –>||Preapproval –>||Mortgage application –>||Home appraisal & underwriting–>||Mortgage closing|
A prequalification letter provides a ballpark estimate of the size of mortgage you’d likely qualify for, helps you set your budget, and demonstrates to home sellers that you’re a serious buyer. To get prequalified to buy a home, you’ll give the lender information about your income, debts, assets, and other financial details.
Don’t let terminology trip you up. Prequalification is technically a bit different from preapproval, but you sometimes hear the terms used interchangeably. Lenders each have their own qualification processes and may use the terms “prequalification” and “preapproval” slightly differently.
Preapproval is typically the next step. You’ll complete a mortgage application and the lender will verify your financial information and conduct a credit check. The bank or lender will then issue a preapproval letter indicating the amount you’re likely able to borrow. The preapproval letter (sometimes called a prequalification letter) is typically good for 30 to 60 days and shows that a lender is preliminarily willing to give you a mortgage, pending further verification and underwriting.
If your preapproval is declined, ask the lender to explain the reasons and to provide a copy of the credit score that was used, so you can figure out what you can do to improve your financial profile and get approved.
A preapproval letter puts you in a good position to make an offer to purchase a property, and it lets the seller know that a lender has already looked at your finances and will likely provide financing. However, getting a preapproval doesn’t mean you’re committed to that lender. You can finalize your choice of lender later, after you’ve made an offer on a home.
It’s wise to shop around and compare loan estimates from at least three mortgage lenders. To get a loan estimate, you’ll need to provide the following:
- Social Security number
- Property address
- Estimated property value
- Desired loan amount
You may provide additional information about your debts, other sources of income, and what down payment you expect to make. Providing the lender with specifics on the following items will ensure you get a more accurate loan estimate:
- Fixed- or adjustable-rate loan
- Loan type: conventional, FHA, VA, USDA, etc.
- Points to lower your interest rate
- Lender credits toward closing costs, if applicable
- Locked-in interest rate
When you’re ready to work with a particular lender, tell the loan officer that you’re ready to proceed with the mortgage application. The lender shouldn’t collect any fees, such as an application fee or appraisal fee, until you officially express your “intent to proceed.”
Your loan officer will assist you in filling out the complete mortgage application. It’s your responsibility to provide documents such as:
- Driver’s license or state-issued ID
- Social Security number
- Pay stubs for the past 30 days
- W-2 forms for the past two years
- Two most-recent months of bank statements
- Federal tax returns for the past two years
- Information on all debts and assets
- Proof of any other income, such as alimony or child support, if applicable
- Certificate of homebuyer education or housing counseling, if applicable
Home appraisal and underwriting
During underwriting, the lender will review your application, order a home appraisal, and ask for any additional documents to assess whether you’re a good enough credit risk. Be sure to check your email, phone messages, and paper mail for these critical communications, and respond quickly.
The home appraisal establishes the market value of the home. This is not to be confused with the home inspection, which identifies potential problems with the house or needed repairs. The appraised home value lets the lender know whether there is adequate collateral on the mortgage loan.
During underwriting, the lender will analyze your creditworthiness or your risk factors for failing to repay your home loan. During the mortgage process, lenders consider and document the following items:
- Your loan-to-value ratio
- Credit score and history
- Occupancy (primary, vacation, or investment home)
- Purpose of the loan
- Amortization schedule
- Type of property
- Number of units on the property
- Debt-to-income ratio
- Cash reserves
What happens after the underwriter approves the loan?
If the underwriter is satisfied with your creditworthiness and approves the loan, you’ll be able to move forward to the closing. By law, you’re required to receive your five-page closing disclosure at least three business days ahead of the closing date, to ensure you have enough time to carefully review and compare it with your most recent loan estimate. There shouldn’t be any significant changes that you haven’t agreed to.
At the closing itself, you’ll need to bring:
- Cashier’s check or proof of wire transfer for the exact amount you need to pay at closing
- Your closing disclosure
- Co-borrowers or co-signers, if any
- Your check book, in case of last-minute expenses
- Your driver’s license or ID
Depending on what state you live in, you may need to hire a real estate attorney to act as the closing agent. Otherwise, a representative from the escrow or title company will walk you through the paperwork, explain everything you’re asked to sign, and collect all payments.
Be sure you’re completely comfortable with the contracts that you’re signing before proceeding. With a purchase mortgage, you will not have a right to rescind the loan after the closing documents are signed. However, if you’re refinancing a mortgage or taking out a home equity line of credit (HELOC), you do have a right to rescind or cancel the contract after signing, up until midnight of the third business day.
How long does it take to get a mortgage?
The average time to close a mortgage loan is 49 days, according to ICE Mortgage Technology, but the timeline varies by lender. It could take much longer if lenders are swamped with a high volume of mortgage applications, there’s a delay in scheduling an appraisal, the appraisal comes in lower than expected, or your credit report changes before the loan is completed.
To avoid any delays, follow these tips:
- Avoid new debt: Don’t apply for new credit cards or loans (or close any accounts) during the underwriting process, since these actions might lower your credit score or change your debt-to-income ratio and, ultimately, delay your closing.
- Be responsive to your lender: You don’t want to miss any communications requesting additional documentation or explanation of your finances, because if you fail to respond, your mortgage application could be held up.
- Review your documents thoroughly: During your three-day review period, read your closing disclosure carefully and clarify any inconsistencies that you find between this document and your loan estimate. If you’re uncertain, consider hiring a real estate attorney to review your documents. If you’re an active-duty service member, you can get free legal review of your contracts.
Mortgage process FAQs
What does a loan processor do?
The loan processor reviews mortgage applications and gathers and verifies financial documents. He or she may request additional information that will be needed by the mortgage underwriter. Be sure to answer any queries from the loan processor promptly so the mortgage underwriting process can proceed smoothly.
What do lenders look at during the mortgage review process?
Lenders want to make sure you’re able to afford the mortgage by verifying your income, assets, and other debts. They consider your creditworthiness by checking your credit history to see how well you’re able to handle debt repayment. The market value of the home you’re buying is also critical, as that is the collateral for the loan in case you default.
What are red flags for underwriters in the mortgage approval process?
Underwriters pay extra attention to any unusual financial activity and may need documentation to explain it. For example, a large deposit into your bank account may require a letter to explain that it is a gift from a family member for the down payment. Significant changes to your income stream, such as those due to a job loss or new employment, would likely warrant a second look.