The loan approval process may seem convoluted with confusing language and odd delays. In a way, it does have its own language – and understanding that language can give you a better feel for where you are really at in the process.
Let's draw an analogy while we look at things from the lender's perspective. When lenders evaluate you for loan approval, they are assessing risk – just as you would do greeting your daughter's new boyfriend at the door for the very first time.
- Pre-Qualification – In the case of your daughter, you are looking out of the peephole and assessing whether to even open the door. In the case of a loan, the bank is taking a superficial look for any red flags – usually a simple review of your debt, income, assets, and overall financial situation based on your word. You can discuss goals and plans, and get some idea of the size of mortgage for which you qualify.
- Pre-Approval – With your daughter's boyfriend, you invite him in to find out more about him. With the loan approval process, the lender is doing the same thing to you. You will fill out an application with more detailed information on your credit rating, financial background, housing and employment history, current expenses, assets and debts, and other information. At this stage you need records such as your W-2, bank statements; proof of retirement accounts, stocks and mutual funds and their balances; a recent pay stub; and proof of identity. You can check your credit score and read your credit report for free within minutes using MoneyTips' Credit Manager.
Within three days after your application is received you will get a Loan Estimate and a Closing Disclosure form. This covers the terms and conditions of your potential loan and all of your payment information. (In other words, you've processed and conditionally approved your daughter's boyfriend.)
Upon selecting a house, you'll fill in the remaining information on the application and your loan application becomes formal. (Presumably, your daughter's boyfriend already selected her.)
- Processing – At this point a Loan Processor becomes involved; they will check all of the information on your application as well as look for evidence of any undisclosed debts, bankruptcies, child support payments – anything related to your potential ability to repay. They will also check your down payment to make sure it's not another form of hidden debt.
If there are any issues, they will ask you for clarification before proceeding (just as you would with your daughter's boyfriend). If your information checks out, the processor sends the information on to the underwriter, who makes the final decision for approval.
In the meantime, the house must be appraised, and title insurance must be acquired. If the appraisal is considerably off from what was expected, the Loan Estimate and Closing Disclosure do not reflect the true costs anymore, and new disclosures must be created (thus causing delays).
- Underwriting – Finally, we reach the decision maker – you in the case of your daughter's boyfriend (you wish!), and the underwriter in the case of your loan. The underwriter makes sure that all the necessary information is in place (if not, you will need to supply further information to avoid delays) and that the loan meets collective guidelines. If the underwriter decides that loaning money to you is in the best interests of the lender, you will receive a loan commitment letter, allowing you to make an offer on a house – and if accepted, will lead to closing on your new home.
Congratulations! You now have an approved loan and will soon have a new home – or in the case of the analogy, a potential son-in-law. Let's hope he doesn’t plan to move in with you.
If you would like to receive mortgage quotes from multiple lenders online – at no cost or obligation -- there are a number of companies who stand ready to assist, such as AmeriValue.
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