There are two primary steps involved in the mortgage approval process. Well, three actually. A prequalification, a preapproval and a full approval. The prequalification is relatively painless and often done over the phone with your loan officer, although a face-to-face process is also a great way to start.
Your loan officer will ask a series of questions primarily about your job, income, credit and how much money you have available to close on a home. How much is needed adds up a down payment (if needed), closing costs and cash reserves.
Cash reserves is simply how much money you have left over after the loan has completely closed. This amount is calculated as how many months of house payments are left over in your bank account when all is said and done. If the total amount for principal and interest, taxes and insurance add up to $2,000 and the loan requirement is for six months of cash reserves left over in the bank (common) then there needs to be at least $12,000 of available funds left over in a bank account you own. Most first time homebuyer mortgages ask for three months of reserves.
Okay, now let’s say you’ve just submitted your loan application and provided your loan officer with the requested documentation. You can expect to provide your most recent paycheck stubs covering a 30 day period, bank statements showing sufficient funds to close the transaction and the last two years of W2 forms. If you’re self-employed, you’ll need to provide two years’ worth of personal and business income tax returns. Your loan officer has reviewed your credit as well as your documentation and issued your preapproval letter. This letter is key. This letter will state that your application has been reviewed along with your credit report and required documentation. This letter helps you sleep at night. Unless something changes from the time you receive this letter to your closing date, all should be fine. You’ve already done the heavy lifting and your loan officer is tying up loose ends and ordering various third party documents such as title insurance and a property appraisal.
After the loan has been fully documented it is then sent over to the lender’s underwriter. The underwrite makes sure the loan complies with the requested loan program. Underwriting a loan doesn’t really take very long, but it may take time for the underwriter to get to your file. Your loan officer can update you on current underwriting times. It’s during this period that things get a little quiet on your end. You’re just waiting. And you might still be second-guessing yourself and wondering if the underwriter will want still more information. Guess what? The underwriter probably will. But not for anything major. Instead, the underwriter will want some updated information from you. For example, loan files should have all credit documents less than 30 days old. That means you’ll be asked for an updated paycheck stub or bank statement. Once your loan is “signed off,” your papers are drawn and you’re almost there.
You attend your closing, sign where needed and either bring a cashier’s check or wire the necessary funds to the settlement agent. Once complete, the signed documents are returned to the lender for one final review. This review simply makes sure the settlement agent followed the lender’s instructions. The settlement agent typically does so, and the lender then releases your funds and the house is officially yours.
Remember, once you receive your preapproval letter you’re halfway there. All you need to do next is find that perfect home!