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This is a brief summary of the mortgage loan process written specifically for Realtors by Melissa Butler. Melissa is a local loan originator and broker in Huntsville, AL. This summary does not cover all aspects of the mortgage process and is only meant to be used as a general educational resource. Melissa is not an attorney and the following post is not to be taken as legal advice.
FIRST, THE BASICS:
There are a bunch of people other than myself involved in this process. Have you ever wondered why it takes so long to get you to the closing table? There are many, many people in play here trying to get your customers to the table.
I’m a loan originator and a broker, and I deal with many different investors. A broker is different on the mortgage side than it is on the real estate side. On my side, being a broker means that I get to shop around to see who has the best deal. I have different investors I can go through; I can lend my own money, or I can lend someone else’s money. I also have access to the wholesale side, which usually has better rates than your general mortgage app. A mortgage is not a one-size-fits-all kind of deal, so depending on whether your loan is conventional or FHA or USDA you’ll have different rates and guidelines.
Many brokers, including the nation's largest, United Wholesale Mortgage, are working on the #BrokersAreBetter campaign right now to connect people throughout the US with different brokers. If you’re looking for a broker in your area you can go to www.FindAMortgageBroker.com to find someone who does business like me. Brokers can usually close a loan a little faster than your typical bank; we usually close a purchase in 25-30 days and a refinance in 7-10 days.
The mortgage process usually involves the following people:
- Me, the originator/broker
- The investor/lender (I usually have 5 or so that I choose to lend through)
- The mortgage processor
- The underwriter who works with the investor
- The investor’s closing department
- The title company/attorney
- The buyer(s)
- The seller(s)
- The Realtor(s)
Right now the bottleneck in the industry is with appraisals. You’ve probably experienced an appraiser telling you that your appraisal will be back on a certain day, but then a week later the appraisal still isn’t back. We’re currently working on a way to have appraisals done a little quicker – more electronic and hopefully the extra data will help appraisers get their report done a little more quickly.
TIMELINE OF THE LOAN
*A lot of these things are done simultaneously.
One of the first steps when a customer needs a loan is that they fill out an online loan application. You can find my loan application here and it takes about 20 minutes to fill out –- it’s very easy and super user friendly.
Once the client has found a house and has an offer accepted, that contract needs to be sent to the broker/lender and we will lock in the loan. At that point I shop to see who has the best deal -– rates change every day, even multiple times per day depending on the market. My job is to find the best loan fit for the customer, and that’s dependent on their employment history, if they have any gaps in employment, etc.
Once I find the right one I’ll lock it in with that investor, and I know the general turn times for that investor’s team. I send the investor loan estimates and loan disclosures, which have to be sent over within 3 days of me getting the following info from the client: full name, birthday, social security number, property address, sales price, and loan amount. These documents will then be sent to the customer through the investor’s website and the customer has to sign those in order to move forward. If they don’t get signed digitally then the documents are mailed to the customer to be signed, and that takes much longer and could affect the timeline.
I then submit all the documents I’ve gathered through the loan process and the initial application to the underwriters. At the same time, my loan processor will order title and an appraisal. We cannot order the appraisal until those initial documents are signed, so it’s very important to have them signed as early in the process as possible. They can always be changed later and are strictly for compliance purposes.
Once this is done, the loan is approved with conditions. This means that the loan is approved as long as a certain number of conditions are met. Conditions can include:
- Receiving clear title
- Receiving an appraisal
- An explanation of recent credits or debits in a bank statement
Any deposit that is greater than 50% of your monthly income needs to be sourced. My job is to anticipate what the underwriters are going to ask for so I can request the fewest documents from your clients and ideally only have to request them once. No one likes to be asked for an additional document every day. If I can get everything up front and do the best possible initial underwrite by myself, I can then make it a smoother process for your clients.
Once I receive the initial conditions (title commitment, appraisal, etc.), they’re submitted back to underwriting. When we have fulfilled everything the underwriter needs, they will require us to send out a closing disclosure, which is basically a loan estimate but in a more final format.
Back in 2015, it was decided that clients would have to sign a closing disclosure. This CD doesn’t actually have to be 100% accurate, it just has to be fairly close to what the final numbers will be. In order to send out a closing disclosure we have to have the title work, the appraisal, the client’s driver’s license, home insurance, and a few other things, so it’s always a race to get all these documents as quickly as possible so we can send the closing disclosure out because it has to be signed 3 days prior to closing. When the closing disclosure has been signed then we move from “Approved with Conditions” to “Clear to Close.” CTC is always cause for celebration.
At this stage, our next step is balancing the closing disclosure so the client has an idea of how much money they will have to bring to the closing table. Once the numbers are finalized, the package goes out -– the huge stack of papers you sign at the closing table. The attorney and the investor’s closer will put that together, everyone will sign it, and then the loan funds. Often at the closing table the attorney will go check to see if they have everything to fund the loan; the attorney is making sure that the mortgage has been signed, the deed has been signed, and everything else has been signed and sent to the investor’s website before the loan can be funded. Once the attorney receives this funding, your clients are free to get their keys.
CLOSING DELAYS
There are a million things that can go wrong in the mortgage world, and my job is to educate everyone up front so there are no surprises or delays on my side.
Some things that can cause delays:
- Not getting documents from clients immediately
- Sometimes clients won’t want to give us their paystubs or won’t know where their W2s are, but these are very important to the mortgage process and we always have documents shared through a secure folder to ensure safety.
- Common documents needed for a loan application:
- 2020 and 2019 W2s (last two years) OR 2 years of tax returns if self-employed
- Picture of driver’s license
- 30 days worth of paystubs
- 2 months of bank statements showing the money for down payment
- Title orders taking too long
- When title takes too long to come back, it affects our timeline and can delay closing. Different attorneys’ offices will order title at different stages of the process, and if it’s ordered too late then it won’t come back in time for us to finish everything and close on time. It’s very important to work with an attorney who orders title right away to prevent any delays.
- Appraisal delays/review times
- People often think that once the appraisal is back we’re good to go, but there is actually a whole team from the investor’s website that has to look at this appraisal and make sure it’s okay. It also goes through an appraisal management company to check for poor comps, incorrect dates, etc. before it’s cleared.
- Underwriter review times
- This is why it’s very important for your clients to submit all their documents up front; if an underwriter has to come back to us and ask for more information it can delay the process.
- Employment verification
- With everyone working from home right now, HR is typically a little behind in getting people their verification letters.
- Tax transcripts
- We have to pull tax transcripts on anyone who is either self-employed or retired. During COVID, they’re requiring anyone who is self-employed or receives any income from the government to pull their own tax transcripts, and walking people through the IRS website can take quite a long time.
- HOA & condo documents
- We need to have all the homeowner’s association documents and be able to contact the rep from your HOA.
- Builder documents
- FHA/VA Amendatory Clause
- If your clients have an FHA loan or a VA loan, you will need that Amendatory Clause. Please send it along with the contract; if we don’t receive it early on then the processor will have to request it later in the process and that will eat into our timeline.
WHAT IS UNDERWRITING (AND WHY DOES IT TAKE SO LONG)?
Everyone sees underwriters as these mythical people who sit in their homes and try to prevent you from getting a loan, but underwriters are really normal people who are just following guidelines! Their sole purpose is to make sure the people we lend money to are able to pay back their loans. They have to follow the guidelines of Fannie Mae/Freddie Mac, the organization that makes the mortgage rules and acts as the largest purchaser of loans to be serviced -– they buy about 90% of loans and basically control the mortgage world. In order for loans to be purchased and serviced by FM, we have to meet specific guidelines and ensure clients can afford this large mortgage they’re going to be paying off for the next 30 years.
Underwriting turn time varies between investors. One of the best ones we work with can go through underwriting in just 4 hours, which means that if you submit a document they are guaranteed to look at it within 4 hours. This is huge and is extremely helpful if a condition comes out last minute and all of a sudden we need an additional document from the client. If that document can be submitted and approved through underwriting in just 4 hours then it likely won’t affect our closing timeline. Many other investors can take up to 4 days for a document to go through underwriting, which can delay closing. It’s my job to pick the investor that will move you along the quickest and get us all to the closing table.
HELPFUL INFO
- If your client will need to do a mail away closing, please tell me ahead of time. If your client is going to be moving out of the country and won’t attend closing in person, that affects my timeframe and how quickly I can get the package out.
- If there are any large repairs to be done or any foundation work, that can affect the appraisal. It’s a good idea to try to have those things repaired before the appraiser comes out, so let me know about anything like this so we can work together to get you clear to close.
- The lender doesn’t know ahead of time if they’re going to be working with a planned unit development (PUD) with HOA fees. If the client has a high debt-to-income ratio, the additional fees can affect the loan. The same thing applies to a property in a flood zone that requires additional flood insurance. To make this easy to find, my website has a helpful information section that shows you the FEMA map and lists all zones that require additional flood insurance.
DEAL KILLERS
- New credit opened during the loan process
- During the mortgage process, your clients are credit monitored. This means if someone else pulls credit on them (for example, when they open a new credit card) it will be flagged. We will have to get that new debt amount and add it to our debt-to-income ratio.
- Untraceable funds
- All funds for the down payment must be seasoned. This means these funds must have been sitting in your account for two months prior to closing. If we see a large deposit into the account just a couple weeks before closing, we will have to figure out where that money came from. You cannot use cash toward a down payment, and if we can’t trace the funds then you won’t be able to use them. If the client is getting gift funds, try to make sure they have been deposited into the account with enough time to season them to avoid the additional process of tracing them.
- Debt-to-income ratio
- If the DTI is too high and then we find out the client is in a flood zone and can’t get cheap flood insurance, that can kill a deal.
- Short appraisals
- A loan can only be given for the appraised value of a home, never for more. This is to protect the lender. If an appraisal comes back at less than the agreed upon sales price and the seller refuses to come down in price and the buyer can’t make up the difference in cash, the deal can fall through.
- Incorrect information
- Incorrect employment
HOW DO I SPEED THIS UP?
- Set realistic expectations for your clients
- Encourage your clients to move quickly and provide information as soon as possible
- Put the title company on the sales contract
- Schedule the termite inspection and the appraisal time as soon as possible
- Get the FHA/VA Amendatory Clause
PRE-APPROVALS IN TODAY'S MARKET
- Get pre-approved before you even start looking at houses
- Get a pre-approval without contingencies
- Some contingencies could include having to sell their current home before buying a new one, requiring a home or termite inspection, etc.
- Based on current employment
- We cannot count your income from future employment. For example, if you are starting a new job in 3 months, that future income cannot be counted.
- Have your money in the bank
- If your client has money in a Charles Schwab or Fidelity account that they plan on using toward their home purchase, tell them to go ahead and liquidate that money. It takes time to liquidate accounts like this, and we want time on our side.
WHAT'S A RECAST?
Sometimes you’ll have a client who needs to sell their house and wants to put all the profits down on a new home purchase; they have enough money to put 5% down and can afford both mortgages, but they want to put more down so that their monthly payment will be lower for the life of the loan.
Recast: Taking a large sum of money and applying it to principal to lower your monthly payment instead of reducing your term.
Typically a homeowner can pay more toward principal and cut a few months or even years off the end of their loan term, but it doesn’t reduce their monthly payment at all. You can instead choose to put down an additional $10,000 or more after your sale and have the servicer evenly distribute it throughout your loan to reduce your monthly payment. It’s a different way to lower your payment without having to do a refinance. This method can also help you remove contingencies on your pre-approval letter.
If you’d like to get your own QR code to make it easier for your clients to apply for pre-approval, let me know! When your clients use this for their pre-approval I’ll be able to tell you whether they’ve finished applying or not and what stage they’re at.
QUESTIONS
Do appraisers see the contract? And do they take multiple offers into consideration?
Melissa: Yes, they do see the contract but they only see that one contract and not the other offers that were made. In order to order an appraisal, I have to submit the contract. The appraiser will take the contract into consideration, but it’s really the comps in the area that they’re using. They check to make sure the house was priced correctly when it was listed, and if it wasn’t priced correctly it likely won’t appraise for the amount in the contract. Appraisers do not take a multiple-offer situation into consideration when appraising a house. An escalation clause doesn’t really matter to a lender either; it’s solely what the house appraises for. If the buyer is willing to pay that amount for the house anyway, they would be required to make up the difference if the house doesn’t appraise. The loan itself can never go above the appraised price.
I have seen some situations where the appraisal has been disputed, and sometimes it works in your favor and sometimes it doesn’t. One situation in particular that I saw recently was where a Realtor disputed the appraisal based on the limited inventory in our area and what people are willing to pay for homes here right now, and the appraisal was revised. If you have additional comps you’d like considered, you can absolutely send those to me and I can make sure the appraiser reviews them. That does take some time, but you can do it.
Why do lenders quote APR?
Melissa: APR (annual percentage rate) is a way for you to compare interest rates universally. It’s basically all of your fees added into the loan. If you have really high lender fees, your APR is going to be higher. Not many people ask me about APR, and I always go by the actual interest rate, not the APR. If you are comparing the fee sheets from investors, you’ll see any lender-incurred fees that will be added onto your APR. The goal is for your APR and your interest rate to be as close as possible.
If a buyer starts with a conventional loan can they switch to a USDA loan before closing?
Melissa: It’s kind of in bad taste to switch from a conventional loan to a USDA loan after the fact for a number of reasons. First, USDA loans take forever. I have to be able to approve the loan on my side and then I have to send it to USDA to get approved, and USDA is government-backed, which generally means it’s slower to get approved. This can absolutely affect the closing timeline. Second, the seller may not have accepted the contract if it said USDA up front, so if you initially put conventional in the contract and then switch to USDA it can create an issue for the seller. And third, the appraisal is different for a USDA loan. I have to order an appraisal for the specific loan type, and there are some appraisals you cannot switch over to a different loan type. This means we would have to reorder the appraisal for the new loan type and have the house re-appraised, which will cut into our closing timeline.
It’s easier to switch from USDA to conventional than conventional to USDA.
Geoffrey: I’d like to add in that switching the loan type listed in your contract could affect your client’s protections and rights. There is a reason why we enter into a contract and list the type of loan in the contract – it’s a protection factor. If you know for a fact your buyer is trying to float different types of loans, don’t specify one in the contract and then just add an addendum once they’ve chosen one. Our market is hot right now and sellers have room to be aggressive about what types of loans they want to see on the contract because they don’t want to deal with a longer closing. Once a portion of the contract isn’t fulfilled, including something as small as the loan type, the contract can technically be voided.
Melissa: If you wrote a contract for a specific loan type and then your client isn’t approved for that loan, you can always write an addendum for the new loan type as well. When this happens, though, your lender may have to start the loan process over again and this can push closing because everything will have to be re-approved.
Why does verification of funds always come up right before closing?
Melissa: There’s always stuff that pops up right before closing! I can’t speak for all lenders, but from my end, if you need additional funds and you provide an additional bank statement that I haven’t seen before and it shows a huge deposit, the source of that money has to be verified and that’s when this last minute verification would happen. To avoid this we always try to get all documents up front and recommend making sure your funds are seasoned.
If a contract falls through but title has already been ordered by the attorney, is the client out the cost of the title search?
Melissa: It’s important to send the contract in to the attorney as soon as possible even if your client hasn’t decided on a lender or loan type yet. The attorney won’t need that information immediately, but they do need the contract in order to order title and get started on their side of closing.
Geoffrey: I start searching title even before a lender is involved because I want to know if there are issues with the property and I want the time to be able to fix those issues. Sometimes it can take an hour to fix a title issue, and sometimes it can take 2-3 weeks if I have to do something like find heirs. Always send the attorney your contract as soon as you possibly can. Don’t just send it to the lender upon ratification; if you know which attorney you’ll be working with then send it to their office up front as well. As the agents, you guys are the lynchpin of all communication on the contract, so it’s beneficial to communicate with as many parties as possible as early as possible. Our business model dictates that as soon as we get a contract in we’re going to take the hit of ordering title. It’s worth it to us to be able to close early or on time and potentially eat the cost of the title search if the closing doesn’t happen than to make every contract wait until we’re sure we’re going to close. That just wouldn’t be practical when we’re in such a tight market and are trying to close everything as soon as possible. You will never be charged for title work by my office unless you close. There are unique situations where I need to do title fixes, and those would be a separate cost that we could discuss.
If the earnest money isn’t delivered, is the contract voided?
Melissa: I don’t require earnest money on my side, so it’s really up to the sellers to decide whether to proceed with the contract. If agreed upon, you can always get an addendum saying there will be no earnest money.
Geoffrey: This is really a question about legal ability vs. practicality. Practically speaking, most people won’t terminate a contract over failure of earnest money being delivered, it’s just a conversation you’d need to have with your clients to make sure everyone is on the same page. We encourage you to always fulfill your end of the contract and do what’s right because there can be legal consequences if you don’t, but there is also a practical way that things are generally handled and that can be taken into consideration as well. We always try to work things out with communication before we let them fall apart.
Melissa Butler
Mortgage Loan Originator/Broker
North Alabama Mortgage
256-679-3638
melissa@northalabamamortgage.com
