Understanding the Loan Process
Many people describe the mortgage lending process as a tangled maze, difficult to navigate. Years ago this may have been true, however with the advent of Web lending services the process of securing a loan is becoming more and more simple. The following article is an introduction to the institutions that lend money to consumers for real estate, the process of securing a loan, along with some basic information on how lenders decide whether or not to lend to a borrower and his/her property.
Brokers versus Bankers - Product Selection
Some mortgage sources are direct lenders such as banks and mortgage bankers with retail establishments. Usually banks or mortgage banks will be competitive in one or several products, and will encourage their sales agents to sell these products to the consumer. Many times banks will not even necessarily try to be competitive in rate, but will instead try to fill a niche, such as quick approvals or flexible underwriting (easier approval) of loans. Going directly to the bank or source was probably the way that your parents obtained their home loan, but the trend is clearly away from such direct establishments towards the brokerage or ``multi-lender platform'' as brokers are now being called on the Web.
Brokers or multi-lender platforms represent a number of lenders and offer these lender's products through a wholesale arrangement. The lender will then compensate the broker when they deliver a loan to them and this compensation is invisible to the borrower. Many banks that offer retail or wholesale loans will allow the broker to charge up to 1% of the loan amount for their compensation. By reducing this 1% fee, a broker can in fact be more competitive than the retail side of the same bank. This is happening more and more as brokers are moving their services to the Internet and reducing their costs of distributing loans to the consumer.
Multi-lender brokers on the Internet can be the most competitive source for mortgage loans available. However, be wary of multi-lender sites that limit their choice of lenders to less than 10 sources. Many such sites are charging the bank to participate and can not offer unbiased selection as they are captive to their lending sources.
Brokers versus Bankers - Service
Direct lenders are captive to their own products. That is, they will not provide unbiased advice nor selection, since by doing so they will possibly risk losing your loan to the company whose product truly provides you the most value. Brokers on the other hand can sell a variety of products, from multiple sources, and can be objective in their recommendations. The compensation provided from one lender is equal to that from another lender, therefore the outcome of the recommendation doesn't matter. What does matter is giving you the best loan for your needs.
If you walk into your local bank, S&L, or retail mortgage bank they'll usually take your application there, perhaps underwrite your loan there, and lend their own money. If your loan is declined for whatever reason, you will need to begin the process again with another source. With a multi lender source, you have another chance if one lender doesn't approve your loan.
For simplicity's sake, we'll describe the overall process that is common to all loan applications regardless of the source of funds.
The Application Process
Whether you walk into a bank, you apply for your loan on the Internet, or a mortgage officer meets you in your home, all lenders require an actual application. The form is standardized and known as the ``1003'' which is the Fannie Mae designation for this form.
The lender will want to verify certain information about the borrower(s) and will require additional information on the property. Borrower information will include verification of income and employment, assets, and credit history of the applicants. Some of this information will be provided by you, the applicant, as part of your application process. For example, you will be requested to provide copies of W-2 forms for 2 years, pay stubs, and bank statements for asset verification. Other information, such as your credit history, will be obtained directly from the credit bureaus even if you have a current credit report on hand. The lenders will always verify this information independently.
For the property itself, the lender will order an appraisal and a legal description of the property, such as a title report. Certain lenders will work with certain appraisal companies, so if you have an old appraisal it may not necessarily be accepted by the new lender. Even if the loan is to be made with a relatively large down payment, the lender still wants the property appraised. In the case of a purchase, other inspections may also be done, but are separate from the appraisal for the loan.
The Approval Process
During the ``processing'' and/or ``underwriting'' period, your credit, assets, income and other determinants are checked and compiled. At the end, your loan is either approved with conditions or approved without conditions or declined. Sometimes a loan is labelled suspended which while sounding harsh, is simply another way of saying that the lender requires more information to decide. Don't be alarmed if your loan is suspended, this is not necessarily a step towards being declined. Usually you can submit additional documents and turn a suspension into an approval.
Conditions are further documentation or checks that the lender needs to finalize your loan before funds can be dispersed. Many borrowers become frustrated by conditions that surface at the end of a loan transaction and can't understand why they are being raised so late. This is because the loan may go through several review processes prior to actual funding, and the final conditions are added on sometimes as late as after the loan documents have been signed. Just work with the lender and remember, the process is not perfect and the lender is simply trying to meet conditions imposed by other sources on them. Since most loans these days are sold and serviced by other parties, the lender must verify that the loan will be salable upon close. Whether or not you are serviced by your original mortgage lender or a new party shouldn't matter, your payment will simply be made to the new institution. No other terms of your loan can be changed after you have signed your final loan documents.
When all conditions are met, your loan documents are drawn up and forwarded to the place of settlement or closing. You sign everything and in some states the lender reviews the package one last time
TIP: Do not make any adverse changes to your financial ``picture'' during this delicate time between approval and when funds are dispersed. Believing the ``approval'' is the final stage or that the lender won't find out about the change in debt or income or other factors can lead to real headaches. Innocent mistakes range from applying for a new department store credit card to purchasing a refrigerator for the new house, to buying two new Mercedes Benz sedans, to quitting a job to go full time into a new business. These changes will at least force an explanation to be given and at worst may cause your loan not to fund and the approval to be withdrawn. Often a lender obtains another credit report and calls your employer one last time before funding the loan.
Simultaneous to funds being dispersed, an instrument is recorded at the county recorders office to give the lender security to your property. This last step varies from state to state.
The Lock Process
Sometime before your loan documents are drawn, you will ``lock in'' a rate for your loan with the mortgage source. The purpose of the lock is to allow you a loan at the ``locked-in'' rate if the loan closes before the lock period expires, even if rates are higher at the time of funding. This could be offered at the application, upon approval, or anywhere in between. Most multi-lender sources give you the choice of when to lock. Typically the shorter the time period between your lock and the actual closing the cheaper the interest rate or points. To read more about E-Loan's lock policy, please click here.
To summarize,there are many ways to approach your home financing process beginning with the source that you choose to borrow from. The advantages of working with a broker or multi-lender platform on the Web are substantial and account for the shift away from banks and direct lenders. Understanding the loan process can minimize the liklihood of frustration during the loan transaction. Remember to work with a source that has established itself as a company with integrity that cares for the borrower throughout the experience.