The process of getting a home mortgage can be confusing.
Its confusing mostly because its overwhelming. Lender spin accounts for a little confusion too. Lastly, the consumers desire for things to be simple makes it more overwhelming still.
One thing that trips up a lot of buyers is the pre-approval.
There’s the pre-approval mantra we hear so often. Homes listed used to say “bring your pre-approved buyers”, bank tag-lines talk about getting pre-approved, stream-lined pre-approval process, pre-qualification and more. Buyers meet up and tell their Realtor that “the loan is APPROVED, we just need to pick the house.” That tells me the mortgage lender is blowing some serious smoke where they shouldn’t be. That seems to be a common belief among buyers though.
Changing gears a bit, the St Louis Association of Realtors standard Residential Contract has a built in loan contingency in the contract. This contingency is called the loan commitment period, a time after which one can not back out of the contract due to the inability to obtain a loan without being in “breach of contract”. Restated simply, a home buyer has a certain period to get their loan approved. Usually about 3-4 weeks are needed to get this (clear) ‘loan commitment’ from a lender.
Back to the whole pre-approval thing. So if a buyer gets pre-approved before starting the whole real estate buying venture, what else needs to be done? Is the home shopper really “approved”?
The answer is NO.
The pre-approval process is usually a basic analysis of the major qualifying information. A few questions about employment terms, annual income, name, date of birth, social security number and so on. A credit report is run, but otherwise, little if any verification takes place before the buyer is pre-approved. Some lenders go further. They may ask for the last two years W-2 forms. The bottom line is that pre-approval amounts to a preliminary screening of the credit worthiness of a buyer.
The buyer finds the perfect St Louis home with their Realtor of choice, they negotiate a deal and are “under contract. Then what?
There’s a bunch of things we’re not addressing on the real estate side, but regarding the mortgage, here’s what happens:
1. The lender gets a copy of the contract and reviews the terms.
2. The lender will need to meet with the buyer, or work via mail to prepare a mortgage loan application.
3. The loan application, along with 2 years of tax returns, a check for the appraisal and other documentation specific to you will be returned to the lender.
4. Good lenders wait until buyer’s have passed through the inspection period to move forward with appraisals, but once they get the green light, an appraisal is ordered.
5. CONDO’s or HOMEOWNER ASSOCIATION HOMES ONLY -Good lenders get necessary questionaire completed early in the process. There may be a fee for this also. Finding out if a condominium can be financed before ordering an appraisal can be good.
6. Lenders get the application, credit reports, all corresponding documentation and the appraisal and submit it to their UNDERWRITER. Good lenders have “in house” underwriters, since having to submit items to an outside source complicate things immensely.
7. The Underwriter responds to the application at some point with CONDITIONS. These are the conditions that need to be “cleared” for them to approve the loan. The fewer conditions the better. Most good lenders would anticipate what conditions would come up and “put out the fires before they start”. Conditions that come up usually are letters of explanation from the buyer, their employers, the appraiser and additional documentation. Sometimes the underwriter can reject an appraisal completely and ask for a new one.
8. Responses to all the conditions must be submitted to the underwriter, then, ideally the loan passes from underwriting to the closing department. At this point, the buyer or buyer’s agent may receive what is known in the St Louis area as “loan commitment”. Other areas of the country are often times not familiar with this term. Here in St Louis, its part of the Residential Sales Contract.
So between the pre-approval process and LOAN COMMITMENT, there are 8 basic “hoops” that need to be jumped through, plus everything else, from writing the contract through inspections that need to be addressed before the bank can give the real approval. Final approval usually happens when the bank wires the funds and authorizes the title company to “fund” the deal, so BUYER’S, keep this process in the back of your mind when you make an offer and make sure you choose your lender quickly after your contract is written.
The moral of this story: a week after a contract is accepted is not the time to still be shopping rates and interviewing lenders! Talk to your Realtor every step of the way and make sure YOUR THINKING correlates to what you’ve agreed to in the contract and everything should turn out fine.
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