What is the mortgage creation process?
Mortgage origination is the process by which a borrower applies for a home loan, as well as all of the steps leading up to the borrower obtaining the keys to the house.
Steps in the mortgage origination process
There are several steps in the mortgage creation process to get you into a home, says Dave Rouse, director of single-family housing for the Wisconsin Housing and Economic Development Authority (WHEDA) in Milwaukee, Wisconsin.
In many areas, home buyers may need pre-approval from a lender to visit a home with a realtor or owner. A pre-approval letter saves time and effort for all involved. During this part of the loan origination process, you provide your lender with specific financial documents, along with a credit check, so the lender can determine if you are a creditworthy borrower. Some of these documents include:
- Up-to-date payslips
- Last two years of tax returns and W-2
- Recent statements of your bank accounts
- Investment information
- Your driver’s license or passport
With all of this information, the lender can make a fair estimate of how much home you can afford.
In addition to pre-approval, you’ll need to complete an application for the specific type of loan you’re looking for, which requires careful consideration of your finances.
“Budget by listing all monthly income and liabilities,” suggests Rouse.
You should also check your credit report for free online at AnnualCreditReport.com. If there are no errors or issues on your report, it’s time to apply. You can usually apply online, over the phone or by mail, or even in person with the lender, especially if you are applying to a bank or credit union.
During the application process, you will receive a loan estimate, a document detailing all the costs of the loan you have applied for. Lenders quote these costs up front so borrowers can compare offers, says Rouse. You will receive the loan quote within three days of the request, or possibly at the time of the request.
Depending on your lender, there may also be a one-time application fee.
Processing and underwriting loans
During loan processing and underwriting, the lender and insurers assess your information, sometimes called your risk profile, to see how much mortgage you can manage and pay off on time.
You will answer many questions, complete many forms and hand over personal documents. Some of the information you will need to provide includes:
- Any debt you have, like student loans and credit cards
- Your employment history and income
- Assets such as bank accounts, stocks and retirement funds
- How much of a down payment you expect to pay and where it came from
- What type of property are you buying
The lender then evaluates all of your information, whether through software, manually, or both, to make a decision about whether to grant a mortgage. At this point, the lender can approve or deny the loan, or request more information.
When your mortgage application has been approved and underwriting is complete, the next step is closing.
Upon closing, you will sign the documents agreeing to the terms of the loan and the transfer of ownership, and you will get the keys to your new home. You will also be responsible for paying closing costs, which may include an origination fee, an expense the lender charges for initiating and processing the loan.
The origination fee “is usually a percentage of the loan amount,” says Rouse, and one of the ways that lenders cover their loan administration costs. Fairly common is 1% – for example, you will be charged a $ 2,000 origination fee on a $ 200,000 loan – but this can vary from lender to lender and market.
There may also be other fees from the lender, such as an underwriting fee or a documentation preparation fee. When there are no origination fees, the lender’s compensation is often built into the rate or profitability of the loan, Rouse explains.
The various closing costs and fees fall into three categories:
- Some may not change
- Some can go up to 10 percent
- Some can go up without limit in special circumstances
If qualifying changes occur, a revised loan estimate will be provided.
Lenders are for-profit entities competing for the lending industry, says Rouse, so “you can shop around. Closing costs and prices vary. Some can negotiate, others cannot.
There are a number of ways you can negotiate closing costs, such as asking your lender for a discount or the seller to step in, or making the costs part of your loan (which can save you money upfront, but may cost you more over the life of the loan).
How to Apply for a Mortgage
The process of creating a mortgage can be time consuming and stressful at times, which is why preparation is essential.
1. Check your credit. Check that your credit score meets minimum requirements and that your report is free of errors. The higher your score, the better your choices and the less interest you pay.
Fix what needs fixing and boost your score where you can by paying off debt and avoiding taking on more. Avoid late payments on rent, credit cards, student loans, or car loans, and be sure to keep the same job if possible, as stability is crucial in a lender’s eyes.
2. Understand the type of mortgage you might want. From conventional loans to USDA loans, know the differences between each type of loan and which one is best for your finances and your situation.
3. Compare offers from different lenders. Finding the best lender for your situation is crucial for your budget. Rouse recommends talking to a number of lenders. Ask your friends, family and real estate agent who they would recommend.
“Find a lender you can connect with, who you trust. Pick one and get pre-approved before you find the right real estate agent to help you find a home, ”says Rouse.
Note that there are different types of lenders: national banks, community banks, credit unions, mortgage brokers, mortgage bankers, and online lenders. Each state also has a housing agency, which usually works with lenders of all kinds and can be a good place to start.
“Every state has a ‘mission-based’ housing finance authority or agency like WHEDA,” Rouse said. “We sell tax-exempt bonds to support low cost home loans to first-time homebuyers and veterans, as well as to provide down payment assistance.”
Image courtesy of PeopleImages from Getty Images.