Understanding the Loan Process - From Start to Finish |
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Starting the loan process can be overwhelming and confusing. But don't worry, below is a step-by-step application/mortgage origination process for a purchase transaction. It explains the role of the mortgage lender, the contractor, the borrower, consultant, the plan reviewer, appraiser and the inspector (12-14 are additional steps involving the rehabilitation of a property.)
1. Homebuyer Selects a Mortgage Lender and Obtains a Pre-Approval Letter.
2. Homebuyer Locates the Property.
3. Preliminary Feasibility Analysis. After the property is located, the homebuyer and their real estate professional should make a marketability analysis prior to signing the sales contract. The property must appraise for what it is being purchased for, otherwise the borrower may have to bring the difference to closing. If there are obvious repairs (anything that affects the home's structure, foundation, livability (health or environmental hazards) the following should be determined:
a. The extent of the rehabilitation work required;
b. Rough cost estimate of the work; and
c. The expected market value of the property after completion of the work. Note: The borrower does not want to spend money for appraisals and repair specifications (plans), then discover that the value of the property will be less than the purchase price (or existing indebtedness), plus the cost of improvements.
4. Sales Contract is Executed. A provision should be included in the sales contract regarding the type of financing being obtained and how long the borrower has to get approved. If the buyer has applied for FHA Section 203(k) or Fannie Mae's Homestyle renovation financing, and that the contract is contingent upon loan approval and buyer's acceptance of additional required improvements as determined by HUD or the lender.
5. If Repairs are Needs, Homebuyer hires a Contractor who Prepares Work Write-up and Cost Estimate. The homebuyer and contractor (where applicable) meet with the fee consultant to ensure that the architectural exhibits are acceptable and that all program requirements have been properly shown on the exhibits.
6. If Government Financing is Chosen, Lender Requests FHA or VA Case Number. Upon acceptance of the architectural exhibits, the lender requests the assignment of a HUD case number, the plan reviewer, appraiser, and the inspector.
7. Appraiser Performs the Appraisal.
8. Lender Reviews the Application The appraisal is reviewed to determine the maximum insurable mortgage amount for the property
9. Issuance of Conditional Commitment/Statement of Appraised Value. This is issued by the lender and establishes the maximum insurable mortgage amount for the property.
10. Lender Prepares Firm Commitment Application. The borrower provides information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish the ability of the borrower to repay the mortgage. If the application is found acceptable, the firm commitment is issued to the borrower. It states the maximum mortgage amount that Fannie Mae, Freddie Mac, or HUD will insure for the borrower and the property.
11. Mortgage Loan Closing. After your loan is approved, you are ready to sign the final loan documents. You must review the documents prior to signing-make sure the interest rate and loan terms are as promised. The signing normally takes place in front of a notary public. There are also several fees associated with obtaining a mortgage and transferring property ownership which you will be expected to pay at closing. Bring a cashiers check for the down payment and closing costs if required. Personal checks are normally not accepted. You also will need to show your homeowner's insurance policy, and any other requirements such as flood insurance, plus proof of payment. Your loan will normally close shortly after you have signed the loan documents. On refinance loan transactions federal law requires that you have 3 days to review the documents before your loan transaction can close.
1. Homebuyer Selects a Mortgage Lender and Obtains a Pre-Approval Letter.
2. Homebuyer Locates the Property.
3. Preliminary Feasibility Analysis. After the property is located, the homebuyer and their real estate professional should make a marketability analysis prior to signing the sales contract. The property must appraise for what it is being purchased for, otherwise the borrower may have to bring the difference to closing. If there are obvious repairs (anything that affects the home's structure, foundation, livability (health or environmental hazards) the following should be determined:
a. The extent of the rehabilitation work required;
b. Rough cost estimate of the work; and
c. The expected market value of the property after completion of the work. Note: The borrower does not want to spend money for appraisals and repair specifications (plans), then discover that the value of the property will be less than the purchase price (or existing indebtedness), plus the cost of improvements.
4. Sales Contract is Executed. A provision should be included in the sales contract regarding the type of financing being obtained and how long the borrower has to get approved. If the buyer has applied for FHA Section 203(k) or Fannie Mae's Homestyle renovation financing, and that the contract is contingent upon loan approval and buyer's acceptance of additional required improvements as determined by HUD or the lender.
5. If Repairs are Needs, Homebuyer hires a Contractor who Prepares Work Write-up and Cost Estimate. The homebuyer and contractor (where applicable) meet with the fee consultant to ensure that the architectural exhibits are acceptable and that all program requirements have been properly shown on the exhibits.
6. If Government Financing is Chosen, Lender Requests FHA or VA Case Number. Upon acceptance of the architectural exhibits, the lender requests the assignment of a HUD case number, the plan reviewer, appraiser, and the inspector.
7. Appraiser Performs the Appraisal.
8. Lender Reviews the Application The appraisal is reviewed to determine the maximum insurable mortgage amount for the property
9. Issuance of Conditional Commitment/Statement of Appraised Value. This is issued by the lender and establishes the maximum insurable mortgage amount for the property.
10. Lender Prepares Firm Commitment Application. The borrower provides information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish the ability of the borrower to repay the mortgage. If the application is found acceptable, the firm commitment is issued to the borrower. It states the maximum mortgage amount that Fannie Mae, Freddie Mac, or HUD will insure for the borrower and the property.
11. Mortgage Loan Closing. After your loan is approved, you are ready to sign the final loan documents. You must review the documents prior to signing-make sure the interest rate and loan terms are as promised. The signing normally takes place in front of a notary public. There are also several fees associated with obtaining a mortgage and transferring property ownership which you will be expected to pay at closing. Bring a cashiers check for the down payment and closing costs if required. Personal checks are normally not accepted. You also will need to show your homeowner's insurance policy, and any other requirements such as flood insurance, plus proof of payment. Your loan will normally close shortly after you have signed the loan documents. On refinance loan transactions federal law requires that you have 3 days to review the documents before your loan transaction can close.
IF APPLICABLE:
If the loan includes a Rehabilitation Loan Agreement, the agreement is executed by the borrower and the lender in order to establish the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, the borrower is required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed.)
12. Rehabilitation Construction Begins. At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Construction may begin. The homeowner has up to six (6) months to complete the work depending on the extent of work to be completed. (Lenders may require less than six months.)
13. Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector. A maximum of four draw inspections plus a final inspection are allowed. The inspector reviews the Draw Request (form HUD-9746-A) that is prepared by the borrower and contractor. If the cost of rehabilitation exceeds $10,000, additional draw inspections are authorized provided the lender and borrower agree in writing and the number of draw inspections is shown on form HUD-92700, 203(k) Maximum Mortgage Worksheet.
14. Completion of Work/Final Inspection. When all work is complete according to the approved architectural exhibits and change orders, the borrower provides a letter indicating that all work is satisfactorily complete and ready for final inspection. If the HUD-approved inspector agrees, the final draw may be released, minus the required 10 percent holdback. If there is unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.
If the loan includes a Rehabilitation Loan Agreement, the agreement is executed by the borrower and the lender in order to establish the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, the borrower is required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed.)
12. Rehabilitation Construction Begins. At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Construction may begin. The homeowner has up to six (6) months to complete the work depending on the extent of work to be completed. (Lenders may require less than six months.)
13. Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector. A maximum of four draw inspections plus a final inspection are allowed. The inspector reviews the Draw Request (form HUD-9746-A) that is prepared by the borrower and contractor. If the cost of rehabilitation exceeds $10,000, additional draw inspections are authorized provided the lender and borrower agree in writing and the number of draw inspections is shown on form HUD-92700, 203(k) Maximum Mortgage Worksheet.
14. Completion of Work/Final Inspection. When all work is complete according to the approved architectural exhibits and change orders, the borrower provides a letter indicating that all work is satisfactorily complete and ready for final inspection. If the HUD-approved inspector agrees, the final draw may be released, minus the required 10 percent holdback. If there is unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.
