How Home Loans Are Made
Step by Step

What the typical home buyer goes through to obtain financing?

1. Pre-Qualification - Lenders are encouraging buyers to get pre-qualified for a mortgage even before they begin looking for a house. This way buyers know ahead of time how much house they can afford. Lenders caution, however, that pre-qualification is only as good as the information supplied by a borrower. Neglecting to mention an outstanding car loan or a previous credit problem for instance could nullity the pre-qualification.

2. Loan Search - Although buyers often use a lender recommended by their real estate agent, some prefer to do their own comparisons. In the current hot real estate market, buyers who plan to do their own homework might want to begin before they even find a house. Borrowers may choose to contact a mortgage broker, who has access to a wide variety of loans, or a direct lender, such as a savings and loan, commercial bank or mortgage banker.

3. Escrow Search - Again, buyers who decide to shop around for an escrow company need to do so ahead of time. It is common for a real estate agent to recommend a company.

4. The Hunt - At this point, the buyer can begin shopping for a house. When the right one is found the terms of the sale are negotiated. Including the sales price and often the type and conditions of the loan being sought. A buyer sometimes will submit a loan pre-qualification letter to the seller, which can tilt a sale in a buyer's favor in a competitive market.

5. Loan Application - It's crucial to supply the lender with as much information as possible, as accurately as possible. All outstanding debts as well as assets and income should be included. On the application is an optional check-off for ethnic background. The information is intended for research purposes and is not to be used in evaluating the loan application. A loan representative is the borrowers main contact through the process.

6. Documentation - Paper work supporting the application also must be submitted. Information commonly sought includes pay stubs, previous year's tax return and a financial statement verifying the source of the down payment.

7. Verification - The lender verifies the borrower's employment, income, and down-payment deposit. The down payment cannot be borrowed, although it can be a gift. A credit report is ordered and verified. The verification process may be waived on certain loans depending on the loan amount and down payment.

8. Appraisal - Lenders require an appraisal on all home sales. This step could kill a deal if a big discrepancy were to exist between the loan amount and appraised value of the house.

9. Title Search - This is the time when any liens against the property are discovered. A lien may have been placed against a property to ensure payment of outstanding debts by the seller. All liens must be cleared by the seller before a transaction can be completed.

10. Termite Inspection - Most loans require an inspection for termite and water damage. Some problems may need to be repaired before finalizing the sale.

11. Processor's Review - The lender's loan processor packages all pertinent information to be sent to the lending underwriter.

12. Underwriter's Review - Based on the information put together by both the loan representative and the processor the underwriter makes the final decision on whether or not a loan is granted. Lenders are looking for borrowers who will make their payments on time and for property that will cover the cost of the investment if a buyer defaults.

13. Mortgage Insurance - Many lenders require private mortgage insurance when borrowers put down less than 20 percent of a fixed rate loan or less than 10 percent on an adjustable. Even if a loan meets the standards of a lender, a mortgage insurance company could choose to deny coverage.

14. Approval, Denial or Counter Offer - In order to approve a loan, the lender may ask the borrowers to put more money down to improve the debt-to-income ratio. The borrower may also need a bigger down payment if the property appraises for less than the loan amount. In some cases, repairs or improvements on the property may be required.

15. Hazard Insurance - In California, lenders require fire and hazard insurance on the replacement value of the structure.

16. Signing - Final loan and escrow documents are signed.

17. Funding - The lender sends a check for the amount of the loan to the Title Company.

18. Close of Escrow - Documents transferring title are recorded with the County Recorder.

19. Confirmation of Recording - The Title Company then authorizes the Escrow Company to draft a check to the seller.

20. Begin making mortgage payments.