While the approval and funding process of a new purchase or refinance mortgage has several moving parts, this article should help you put the basic time line in perspective.
1. Loan Application –
This is where the loan officer spends a little time over the phone or at the office with a potential borrower discussing their lending scenario, financial goals, and required documentation. Depending on the amount of information requested by both parties, a typical loan application generally can take between 15 minutes to an hour.
2. Pre-Approval –
A pre-approval lets the borrower know how much they can qualify for, and is issued once the loan officer has verified income, assets, and credit. As lending guidelines continue to change, most loan officers will take the pre-approval a step further and run a full online Fannie Mae (DU) or Freddie Mac (LP) automated underwriting approval to make sure the borrower has an additional layer of confidence prior to shopping for a new home.
Keep in mind, DU or LP approvals are not considered full underwritten approvals, unless an underwriter has physically analyzed the submitted documentation. Every bank has their own quality control systems for this process, but the average time it should take for a full underwritten approval is 24 – 48 hours. So basically, it is a good idea to get everything in and wait an extra day or so for an underwriter to issue a full approval.
3. Loan Search / Good Faith Estimate –
Once a pre-approval has been issued, it is important that the lender and borrower agree on the actual terms of the new mortgage prior to submitting offers on a new property. A Good Faith Estimate is a form that outlines the interest rate, down payment, purchase price / loan amount, and other estimated closing costs so that the borrower can make an educated decision.
Even though the GFE is an “Estimate” based on the predisclosed costs of the new loan, there are several things that the loan officer doesn’t have control over. Make sure you ask your loan officer what specific line items you can expect to be consistent or change prior to closing.
4. Purchase Offer -
Depending on which market you are in, the purchase offer and acceptance process can be an entirely new beast to deal with. Short Sales, Bank Owned (REO), and Rehab properties may take several weeks of negotiation before a perceived win / win deal is reached. It is important to hire a full-time real estate professional who is familiar with the landscape and knows how to navigate these types of transactions.
Recent neighborhood sales, pending foreclosures, and the actual terms of the purchase agreement are a few things that you need to pay close attention to before you commit to putting a sizable earnest money deposit down.
4. Due Diligence Period –
This is time, as defined in the purchase agreement, that the borrower and seller have to complete all inspections, appraisal, review HOA / Title documents, and anything else that may have an impact on the successful closing of the purchase transaction.
5. Appraisals / Inspections Completed –
Typically, the appraisal and home inspection are paid for in advance by the borrower and have to be completed within 10 days of an accepted offer. The mortgage company orders the appraisal, and the buyer’s agent generally handles the logistics of the property inspection. Most borrowers like to be present at the time of the home inspection, however, the appraisal is handled privately by a third party appraiser.
6. Final Conditions Submitted to Bank -
The appraisal, preliminary title report, and any addition borrower documents are submitted to an underwriter for final approval. This process takes 24-48 hours and is the final step, other than a loan lock, needed to order closing documents.
Proof of hazard insurance is also required prior to ordering loan documents. Some mortgage programs allow a borrower the option of including their quarterly real estate tax payments and annual hazard insurance premium in the monthly mortgage payment by establishing a separate escrow (impound) account. Make sure you know what your total monthly mortgage payments include before ordering documents.
7. Loan Lock –
Mortgage rates have a tendency to change a few times a day depending on market conditions and adjusting credit / bank guidelines. It is important to regularly communicate with your loan officer to make sure you get the rate and closing cost scenario that you have budgeted for.
Some brokers have the ability to change banks or negotiate a lower rate if things change for the better, but you are ultimately putting full trust in your loan officer when it comes to the rate game. Basically, make sure you work with a loan officer that believes in full disclosure, communication, and transparency.
Rates can be locked between 7 – 90 days. A good rule of thumb, the shorter the lock period, the lower the interest rate. Since a .125% adjustment in rate may only impact your monthly payment by a few dollars, it is a good idea to find a rate you are comfortable with and lock as soon as possible. With the rapid fluctuations in pricing due to the turbulence on Wall Street, rates could move .5% in a matter of hours causing monthly payments and closing costs to significantly change.
8. Final Loan Documents Signed -
The final loan documents are delivered to an escrow or title company for preparation. The borrowers will either sign with an escrow officer, or meet an approved notary at a convenient location. The signing generally takes about 1 – 2 hours, depending on the amount of questions the borrower has about the transaction.
If there is additional funds to close, like a down payment or closing costs not covered by the seller, the borrower will bring a certified check to the escrow company. Make sure your loan officer knows where these funds are coming from so that there is a proper paper trail the underwriter will approve.
The final property inspection is also completed during this time. If there are things that still need to be fixed before the you agree to close on the purchase, let your loan officer know to hold off on funding. Unless the rate or documents are set to expire
9. Funding / Recording-
Once the final documents have been signed by the borrowers they are shipped back to the bank for a quick inspection and then set in line for funding. A wire is sent from the lender through a few places and eventually ends up at the escrow company.
Since this process may take a few hours, it is common to hear about a delay between the time a bank “Funds” a loan and an escrow company “Records” a closing.