The Mortgage Loan Process – What You Need to Know From Start to Finish

Buying a new home is an exciting venture, but the mortgage loan process can be an overwhelming experience that deters eager and qualified homeowners. There are seemingly endless options and lenders to choose from, plus the stress of determining your financial readiness.

Despite the stress of getting a loan, we’re here to simplify the process and give new homeowners the confidence they need to get the house they deserve. This guide will remove any confusion surrounding loan procedures, outline the mortgage loan process and empower borrowers to make the most of their mortgage.

1. Get Pre-Approved

The preapproval process is a crucial step in determining what type of property you can afford, what your interest rate options are and the type of mortgage you wish to purchase. Before diving into different lenders, here are some steps borrowers can take before the pre-approval process begins.

Estimate your monthly funds and potential spending

When it comes to your monthly budget, you must consider both payments on the principal balance as well as the amount your interest rate will add to your payments. Often, you need a 20% down payment, and if you don’t have 20%, you may need mortgage insurance, which will add to your monthly expenses.

Use our mortgage payment calculator to approximate your monthly expenses!

Learn about different types of loans

Homeowners should research loan types that will suit their needs and preferences best, especially considering the monthly funds you have available. The process for refinancing a home will be different compared to processing a government-backed loan. Conventional loans, FHA loans, jumbo loans—there are several options that homeowners can consider.

Other fundamental topics and terminology you should be familiar with include:

• 15-year vs. 30-year loans
• Fixed vs. Adjustable Rate Mortgage (ARM)
• The difference between annual percentage rate (APR) and interest rate
• Fees and costs associated with a mortgage loan

Check your credit score

Lenders are going to look at several financial elements, including your credit history, income and other assets. To prepare for the pre-approval process, borrowers should especially look at their credit score since it affects several aspects of their mortgage. Everyone should be able to check their credit history once a year for free without penalty.

Once you’ve decided on a mortgage type and created a budget, it's time to find a credible lender to get pre-approved. The pre-approval includes a document that outlines the maximum amount the selected mortgage lender is willing to loan based on your financial history. These approvals usually happen quickly, so homeowners shouldn’t have to wait too long to get their results. A pre-approval indicates that you’re a serious buyer, which is especially helpful for step 2: finding a property.

2. Find A Property

Finding the right property - one that you love and suits your needs - is often a fun but demanding process. You’ve likely browsed potential homes before the pre-approval process, but now you are prepared to do some serious research and shopping. There are plenty of online tools and websites to help you find the right property for you, or you can find a real estate agent to do some of the research for you.

Make an offer

When you do find your ideal property and are prepared to move forward, it’s time to make an offer. A real estate agent will help with this part of the mortgage process, along with negotiations.

Making an offer usually requires putting down earnest money, which is like a deposit that shows sellers you’re serious about your offer and are ready to commit. Most earnest money is 1-2% of the purchase price, which will go towards your down payment if everything goes through. Offers also include stipulations that protect from being locked in a bad arrangement. These contingencies may be ensuring that the appraisal is close to the loan amount or that the home inspection doesn’t uncover significant issues.

3. Apply For A Mortgage

Once the offer is accepted, it’s time to apply for a mortgage. While most people choose the lender they were pre-approved for, others shop around to see what rates they can get with additional lenders.

Lenders will request and review several financial components, including your credit score and history, income, debt-to-income ratio and assets. They will also consider the type of property you are mortgaging. We’ll review these financial qualifications in greater detail further down, but at least expect the following basic requirements:

• Proof of income (tax returns or documents, W-2s)
• Alternate income information (alimony child support, taxed investments)
• Any current debt you have (car loans, other property, credit cards)
• Bank statements (and any other documents to account for other assets)

4. Completing the Loan Process

Once the lender has the necessary documents and information, they will calculate a loan estimate for the borrower. This estimate should outline the details of the loan in understandable terms and with thorough explanations.

This estimate should be completed within 3 business days of your loan application unless you don’t meet the minimum requirements, in which case the application is rejected. You should be quickly informed if the application is rejected, and the lender has 30 days to provide written notice as to why the application was rejected.

Once you receive the loan estimate, the terms are good for 10 business days, so borrowers should accept the loan terms within that time frame since they may be subject to change after this period. When accepted, the lender will begin processing the loan, which includes steps like:

• Getting a credit report
• Starting a property inspection and appraisal
• Ordering a title search

5. The Underwriting Process

The underwriting process is one of the most important steps in obtaining a mortgage loan.

Underwriting involves thoroughly reviewing and finalizing a loan application. Underwriters look at your finances and credit history, the property details, appraisals, verifying the title of the home, etc. Think of this as the final verification of all of your information and the loan requirements. The underwriter will either approve the loan application as is, reject it or approve it with conditions.

6.Closing on the Property

Once your loan is approved and finalized by the underwriter, the closing process begins. If your application is approved, you will receive a closing disclosure that confirms your monthly payment, down payment, interest rate and closing costs. This most often involves meeting with a representative from the company to discuss the final official terms of the loan.

Borrowers should be given the opportunity to ask last-minute questions, review any changes from the initial estimations to the official costs, etc. This is where you’ll sign the loan agreement, so bring a photo ID and the down payment. Once the document is signed, it’s official: you’re a new homeowner!

What Does A Qualified Borrower Look Like?

There are a couple of key components that lenders look for in a qualified borrower to measure how risky it is to lend to you. The more proof you have of being responsible with your finances, the more you can get from a mortgage loan. While borrowers don’t need to meet all of the loan standards perfectly, all future homeowners should be aware of what the eligibility requirements are and how those requirements affect their options.

Credit Score

Your credit score and credit history determine what you qualify for: loan type, loan amount, interest rate, etc. A high credit score indicates that you make payments on time and you don’t borrow more than you can afford. A low credit score suggests otherwise.

For most loans, a credit score of 620 is required, though there are exceptions. Government-backed loans, for example, often only require 580. Still, if you want to qualify for better interest rates or more funds, a higher credit score gives you better chances.

To verify your credit eligibility, lenders look at:

• Your credit report (which they need written or verbal permission to access)
• Red flags in your financial history such as foreclosure or bankruptcy

Income and Job History

Income is another financial component that lenders look at, specifically to see if you have enough monthly income for the loan amount you want to take out. However, it’s not about a certain dollar amount—it’s about regular and recurring cash flow. For this reason, lenders also look at your job history to see if you can stay employed.

To verify your income eligibility and employment, lenders look at:

• W-2s and tax documents
• Employment history & current employment
• Monthly household income
• Any other forms of income (alimony, child support, etc)
• Pension and social security
• Public assistance

Debt-to-Income Ratio

When determining if a borrower is qualified for a specific loan, lenders look at your income and compare it to your current debt-to-income ratio (DTI). To determine your DTI, lenders take your monthly payments (in debt) and divide that amount by your gross monthly income.

For most loans, like conventional loans, lenders are looking at a 50% or lower DTI. However, lenders, loan types and their individual requirements vary, especially depending on your credit score—so there may be higher cut-offs available to you. Verifying the requisite cash flow includes looking at:

• Car loan payments
• Other mortgages or property
• Student loans
• Credit card payments
• Any other type of recurring debt

Property Type

The property you want to purchase will influence the type of loan you will qualify for too. This is because different property types come with varying levels of risk for lenders, which affects the kind of money you can receive, the interest rates available to you, etc.

For example, a smaller home intended to be a primary residence will be easier to qualify for than an investment property. Lenders will consider:

• The size of the home and property
• The purchase price
• The type of home (single-family, investment, condo, etc.)
• Real estate taxes
• HOA

Other Assets

Something that can help borrowers qualify is having assets that almost act like collateral, meaning if you suddenly cannot make payments from your income, you have other assets to draw money from and make payments. Lenders often just want to see extra funds in the bank, but they’ll want to look at other potential assets, too, such as:

• Bank accounts (including savings, checking or brokerage accounts)
• Retirement accounts
• Investments (like stocks and bonds)
• Other property
• Gifted money
• Money you receive from selling a previous loan

FAQ

Who approves a mortgage loan?

The mortgage loan process is finalized by the underwriter, who approves or denies a loan application. The underwriter is a member of the bank, credit union or lender you are loaning with; and they analyze your finances, verify identification and evaluate the risks of lending with you.

How long does the mortgage process usually take?

On average, the mortgage process takes about 30 days. This timeframe can vary depending on the lender, the type of mortgage you’re applying for, whether you’ve been pre-approved, the property you’ve selected, etc. The entire process can take 45-60 days to finalize, so homeowners should plan accordingly.

How much are closing costs?

Closing costs are usually 2-5% of the purchase price. For example, if you buy a home for $300,000, your closing costs will be somewhere between $6,000 and $15,000. For larger loans, a smaller percentage is often used. Closing costs are made up of fees and processing expenses from lenders, home appraisers, title companies and other third parties.

Trust Pennymac Experts to Get Started

The loan process can be daunting, but with the right expertise, it doesn’t have to be a negative experience. If you’re ready to begin the mortgage loan process, or if you have questions, get in touch with a Pennymac expert today!

For more on the loan process…

• Part 1 - Getting Prepared for the Home Loan Process
• Part 2 - Completing a Home Loan Application
• Part 3 - Understanding Loan Processing
• Part 4 - Explaining the Mortgage Underwriting Process
• Part 5 - The Mortgage Closing Process
• Part 6 - Transfer of Loan Servicing

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