How to get from application to closing - the steps
Applying for a mortgage, whether for a home purchase or when you want to refinance, requires careful preparation and, potentially, can take a month or more to go from the time of application to having your new loan funded. Understanding the steps and knowing what you can do to make things go smoothly can help take the stress out of the process.
Preparing for a mortgage application
In order to apply for a mortgage you will need to gather quite a few documents in order to prove to a lender that your financial situation will satisfy their requirements. These documents (which the lender will later verify) will cover your income, your assets, insurance and your property. Typical documents you will need to gather include:
- The last two years of W-2s, 1099s, or complete tax returns (all pages and schedules) if you are self-employed, or if you own investment properties.
- Your most recent pay stubs showing year to date (to cover one entire month).
- If you are receiving any annuities, pensions or retirement income, you will need to show the award letters.
- Contact information for your employer so that employment can be verified.
- One complete bank statement (all pages) for the previous month.
- 401(k) and other investments statements to show assets.
- Current home owner's insurance statement.
- Current property tax bill.
Your mortgage lender or broker should coach you through this process.
In this step, you provide your lender with all the information that they need, in addition to any that you may have provided on the online application. After you give the lender or broker permission, they will pull your credit report and take a look at your FICO scores. Ultimately, you will receive a completed application to sign and return. Make sure during this step that you ask all the questions that you have and that the lender you are working with fully answers them before you proceed. Spending quality time with your loan officer/mortgage broker when refinancing or getting money to buy a home is something that you pay for. Remember, your loan officer or broker is not doing this for nothing. They get paid very well so make sure that you ask all the questions you need to ask until you are completely comfortable with the process.
Typically, once the application is received, the mortgage professional you are working with will review the application for completeness and ensure you have provided all the necessary documents prior to formally submitting the loan to lender underwriting. You may get requests for more information during this time but you are also free to call if you still have questions or want to understand the timing of the next steps. You should also be sent a Good Faith Estimate of the loan you are being offered, covering the rate and payment for the mortgage and the associated costs you will have to pay to get the loan. Make sure you understand this document in detail. The Good Faith Estimate (GFE) is designed to tell you everything you need to know and to help you compare loan offers from different lenders.
At this point the completed mortgage application moves from the loan professional you've been working with to the back office of your lender. The underwriting team will thoroughly review your application and validate that your personal financial situation and the property you intend to buy or refinance meet the lender's requirements and that the loan rate and fees match their guidelines for people like you. They will typically verify your employment, order and review an appraisal of your home's value, go through your credit report in detail and so on, typically these days with the help of an automated system. They may determine that your loan offer can be approved as is, that you must meet various conditions in order to receive the loan, that the terms (such as the rate and closing costs you were offered for your loan) must change based on the information they turn up, or that you do not actually qualify for a loan after all.
Your mortgage professional should keep you updated on the progress of underwriting and of any issues that may arise. If underwriting uncovers new information that materially changes the terms of the loan you were offered, they must offer you a new Good Faith Estimate.
Often a mortgage underwriter will provisionally clear you to receive a loan but will impose various conditions on you in order that the loan can be finally approved. Typically, you must clear all of these conditions before you can schedule an appointment to sign your loan closing documents. Conditions may range from simple to fix (perhaps you might have to provide some extra bank statements or provide alternative contact information so that your employment can be verified), to the complex. Much harder to clear conditions might include credit report-related conditions such as clearing up past collections or removing a lien on your property (perhaps your previous refinance did not release the lien properly or the IRS has put a tax lien on your home for past tax collections).
If you do not act to clear these conditions promptly, your mortgage refinance or home purchase loan cannot go through. You are advised to move quickly and effectively to get them taken care of.
This can be a lengthy process, particularly for when you are getting a home purchase loan as there are often reams of disclosures and disclaimers to sign. But do make sure you go through this process carefully. It is vitally important that you understand everything that you are signing and that all the financial details on your closing statement and loan documentation match the last Good Faith Estimate you received and that, if they don't, you ask why and make sure everything is correct. Many expense lines on you GFE are not legally allowed to change by closing, some may change but only within limits and others may vary quite reasonably. Ensure that you compare what you are signing to the GFE and understand every difference — it is a red flag if the differences cannot be explained to your satisfaction.
If you get through this process with your sanity intact, clearly understanding everything about the loan you are getting and why you are being charged everything you have just signed a check for, congratulations, your loan is about go through and be funded and you have made a smart money choice.