Understanding The Mortgage Process For First-Time Homebuyers

by Gustan Cho

This ARTICLE On Understanding The Mortgage Process For First-Time Homebuyers

Understanding The Mortgage Process For First-Time Homebuyers is important.

  • Most homebuyers will need a mortgage when buying a home
  • For most people, a mortgage can be intimidating and not a subject they want to learn
  • Understanding the mortgage process is not difficult
  • We will explain the step by step process on how the overall homebuying and mortgage process where it is very easy to understand
  • Understanding the home buying and mortgage process will avoid stress since you know what to expect
  • Be proactive with your loan officer
  • There is no such thing as a stupid question
  • The only stupid question is not asking the question
  • Remember that most people do not go through the mortgage process often
  • Most people will apply for a mortgage once every five to ten years
  • In five or ten years, the mortgage process and/or regulations can change
  • A home is most people’s biggest investment in their lifetime
  • Therefore, it is to your best benefit in understanding the mortgage process

In this article, we will discuss and cover Understanding The Mortgage Process For First-Time Homebuyers.

The First Step On Understanding The Mortgage Process Is Consulting With A Loan Officer

What is the first step to understand the mortgage process

Under no circumstances start preparing for a mortgage without consulting a loan officer.

  • Many homebuyers take the matter into their own hands and start preparing for a mortgage by hiring a credit repair company to repair their credit
  • This can be a disaster and do much more harm than good
  • Credit repair companies go about disputing derogatory credit tradelines such as outstanding collections, charged-off accounts, late payments, bankruptcy, foreclosure, judgments, tax liens, and other negative tradelines
  • Credit disputes are not allowed during the mortgage process unless they are exempt disputes which we will talk about later in this article
  • A pre-approval letter with outstanding credit disputes is null and void
  • The reason why credit disputes suspend the mortgage process is that all credit bureaus will remove the negative scoring formula on disputed credit items
  • So if the verbiage that consumer disputes this credit item is posted on the consumer credit report, the credit scoring formula treats that disputed item like it does not exist
  • Therefore, disputed items will increase the consumer credit scores
  • When consumer retracts the credit disputes, the consumer credit scores will drop because the credit scoring formula will reinstate the negative factor into the credit scoring formula
  • All non-exempt credit disputes need to be removed from consumer credit reports in order for the mortgage process to process
  • Do not hire any credit repair companies in order to qualify for a mortgage

Older derogatory credit tradelines that are 24 months or older have little to no impact on consumer credit scores.

Exempt Credit Disputes That Do Not Have To Be Removed To Qualify For A Mortgage

There are certain types of credit disputes that do not have to be removed.

  • All credit disputes of medical collection accounts are exempt from credit disputes
  • Medical collections, no matter how large the outstanding balance, does not have to be removed
  • Any non-medical credit disputes with zero balances do not have to be removed
  • If the aggregate of outstanding collection balance is less than $1,000 from all creditors reporting with outstanding collection accounts, those credit disputes from creditors do not have to be removed
  • Any non-medical credit disputes that are older than 24 months are exempt from credit disputes
  • As long as the non-medical derogatory credit tradeline date of last activity (DLA) is older than 24 months old or older, you do not have to remove the credit dispute
  • This is why it is so important why you should not take matters into your own hands in preparing for a mortgage prior to consulting with a loan officer

You should interview several loan officers and not commit to hiring the first loan officer you talk to.

Understanding The Mortgage Process: Interviewing Loan Officers

Choosing and hiring a lender and loan officer is hands down the most important step in the home buying and mortgage process.

  • Not all lenders have the same mortgage lending guidelines on FHA, VA, USDA, and Conventional loans
  • All lenders will require their borrowers to meet the minimum agency mortgage guidelines of the type of loan program you select
  • However, lenders can have their own higher lending requirements that are above and beyond the minimum agency mortgage guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac
  • For example, to qualify for a 3.5% down payment home purchase FHA loan, the minimum credit score required by FHA is 580 FICO
  • However, most lenders will not qualify a borrower without a 620 credit score
  • Other lenders may require a 640 FICO on FHA loans when FHA only requires a 580

This is called a lender overlay on credit scores.

Choosing A Loan Officer You Can Get Along With During The Homebuying Process

Is the selection of a loan officer important in the home buying process?

Understanding the mortgage process is very important for borrowers who are told they do not qualify for a mortgage.

  • Not all lenders have lender overlays
  • Just because you do not qualify at one lender does not mean you do not qualify at a different lender with no lender overlays
  • Make sure you are not pressured in hiring the first loan officer you meet
  • Talk to several loan officers. Get referrals from family and friends, neighbors, co-workers, realtors, accountants, and other people you know
  • Google their names as well as the name of the company
  • Check out their online reviews
  • Not everyone can have perfect 100% satisfied client reviews, but see what the lender and/or loan officer comeback response was
  • Remember there are always two sides to the story
  • Get to know the loan officer over a few days and/or weeks
  • See how they respond back to you when you leave a message
  • See if they work after hours, holidays, and/or weekends
  • Communication is key
  • You need to be able to get a hold of the loan officer during the mortgage process. You need to like and get along with your loan officer
  • Ask the loan officer the types of lender overlays their company has

Once you feel you met the right loan officer and lender, the pre-approval stage can officially begin.

Choosing A Lender With No Lender Overlays For Borrowers With Less Than Perfect Credit

Over 75% of our borrowers at Capital Lending Network, Inc. are folks who could not qualify at other lenders due to their lender overlays.

  • Let’s take a case scenario example on lender overlays on VA loans
  • Most lenders will have a minimum credit score requirement of 620 to 680 FICO on VA loans
  • Why are lenders requiring a 620 to 680 credit score requirements when there are no credit score requirements on VA loans?
  • This is because most lenders have VA lender overlays on VA loans
  • Capital Lending Network, Inc. has zero overlays on FHA, VA, USDA, and Conventional loans
  • There are lenders with no lender overlays such as Capital Lending Network, Inc. and Gustan Cho Associates
  • Anyone with a 700 plus credit score, lower down payment, low debt to income ratio and perfect credit history can qualify for a mortgage at any lender
  • However, not everyone has great credit and can qualify for a mortgage at any mortgage company
  • Do your research in choosing and hiring a lender and loan officer
  • If you have good credit, you have more options
  • If you have less than perfect credit and lower credit scores, you may need to choose a lender with no lender overlays like Capital Lending Network, Inc. and/or Gustan Cho Associates

Capital Lending Network and Gustan Cho Associates has zero lender overlays on government and/or conventional loans.

The Importance Of A Solid Pre-Approval Letter

One of the biggest reasons for stress during the mortgage process and/or a last-minute mortgage denial is due to the loan officer issuing a pre-approval letter without them properly qualifying the borrower.

  • The qualification and pre-approval step of the mortgage process is the most important
  • The loan officer needs to thoroughly review the mortgage loan applicant’s application, credit report, income docs, mortgage documents, bank statements, and run the borrower through the automated underwriting system (AUS)
  • The loan officer needs to make sure there are no non-exempt credit disputes prior to issuing a pre-approval letter
  • If the loan officer has any potential issues he is concerned about, he needs to check with the underwriting help desk of the lender and/or get a second opinion
  • There is no reason why pre-approved borrowers should stress during the mortgage process and/or get a last-minute mortgage denial
  • Pre-approvals should not be rushed
  • A borrower with a solid pre-approval letter should not just close on their home mortgage but should close the home loan on time

With a solid pre-approval letter, the borrower can now hire a real estate agent and start shopping for a home.

Understanding The Mortgage Process And When It Starts

When does the credit process begin

The actual start of the mortgage process is once you have an executed real estate purchase contract. You will notify your loan officer and forward the executed real estate purchase contract. With the purchase contract, the loan process officially begins. A mortgage processor will be assigned to your file. The first thing the loan processor will look for is when is the closing date. Most purchase mortgages will close in 30 days. The role of the mortgage processor is to gather all the important documents for the mortgage underwriter to review and issue a conditional loan approval. The mortgage processor will make sure all documents from the borrower are complete, legible, and labeled for the underwriter.

Importance Of Complete Legible Documents

The mortgage process is a two-way partnership for it to run smoothly. Borrowers need to fully cooperate in getting documents to the processor in a timely manner. All documents provided should be complete, legible, and labeled.

Here are the documents mortgage processors will request from the borrower and gather for the mortgage underwriter:

  • Copy of executed real estate purchase contract
  • Paycheck stubs for the past 30 days
  • W-2 forms for the past two years
  • Copied of the front and back of drivers license and social security card
  • Letters of explanations
  • Details about long-term debts, such as auto and student loans
  • 60 days of bank statements from the bank account with the funds of the down payment and closing costs
  • Divorce decree if applicable
  • Bankruptcy and/or foreclosure paperwork if applicable
  • The previous year’s tax return (the past two years if you’re self-employed)
  • Proof of any supplemental income
  • Proof of homeowner’s insurance

Mortgage underwriters will kick the borrower’s file back if the documents are not organized, legible, labeled, or have missing pages which will cause a delay in getting approval. Once the mortgage processor feels she has the whole package complete, she will submit it to the underwriting department of the lender. A mortgage underwriter is assigned to the borrower’s file. The underwriter will thoroughly review and underwrite the borrower’s file and if all is good will issue a conditional loan approval.

The Underwriting Step Of The Mortgage Process

Other documents that the mortgage underwriter may possibly need to underwrite the file.

  • The mortgage underwriter can request additional documents as the file is being underwritten and list it on the conditional loan approval
  • Once the mortgage underwriter feels the borrowers qualified for the loan program they applied for, they will issue a conditional loan approval

On the conditional loan approval, the following conditions is common:

  • Letters of explanations for line items the underwriter needs clarification
  • Additional documents to justify and prove the borrower’s income
  • If applicable, documents of divorce decree, child support, bankruptcy, foreclosure, or other out of the ordinary items/events
  • Home appraisal if not yet ordered

Once the mortgage underwriter issues a conditional loan approval, the file goes back to the mortgage processor. The mortgage processor will now gather the list of conditions to submit the file for a clear to close.

Clearing Conditions For Clear To Close

What is clear to close

The final step of the mortgage approval process is for the mortgage processor to gather the list of conditions from the conditional loan approval and submit it for a clear to close. Mortgage underwriters can issue updated conditional loan approvals with new conditions that were not on the previous conditional loan approval. Therefore, there may need to be two or more rounds of submitting conditions for a clear to close. The mortgage processor will gather all the conditions. Once the processor has gathered all the conditions from the list, she will then submit it back to the same mortgage underwriter for a clear to close. The mortgage underwriter will carefully review the conditions. If everything looks good and complete, the mortgage underwriter will issue a clear to close. A clear to close often referred to as a CTC is issued by the mortgage underwriter and means the lender is ready to prepare the closing docs and wire the funds to the title company. The CTC is the finish line of the mortgage process. Once the file has been cleared to close, the mortgage processor will work with the closing department of the lender in setting up the home loan closing with the title company.

5 comments

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5 comments

Mike Jameson November 19, 2020 - 1:28 am

First time home buyer looking for down payment assistance programs that accepts manual underwrites. Discharged chapter 13 that is less than 2 years old. Looking for FHA loans for homes in cook county of Illinois

Reply
Amber Passinelli November 23, 2020 - 5:03 pm

Your article definitely makes sense about getting stressed over the loan process I am going through now. I had it with this mortgage underwriter who keeps on coming up with the dumbest conditions after she issues an updated conditional loan approval I should not keep on delaying the closing date due to the mortgage underwriter suspending the mortgage process. I am wanting to do an FHA refinance. I have a large escrow shortage so cannot do the streamline. I’m working w another lender but frustrated. I have an appraisal already. Does that transfer? How quickly can you close me and how much is origination costs? My five was 618 when pulled for this transaction. What’s the interest rate as well? Thanks Amber

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L. Martin December 2, 2020 - 4:13 pm

We are currently in Chapter 13 bankruptcy. It has been almost 3 years and payments are current.

Reply
Verification Of Employment During The Mortgage Process By Lenders December 3, 2020 - 1:53 am

[…] Borrowers should not change jobs and/or resign from their jobs during the mortgage process […]

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Jamie Hollister December 5, 2020 - 7:18 pm

All lenders use the automated underwriting system on government and conventional loans before proceeding to the next step of the mortgage process? I am 100% disable veteran who is tired of renting and paying more than a mortgage for rent. I don’t have the best credit but am willing to do what is needed to move into a home as soon as possible. I am eligible to use my V.A. home loan and 100%`property tax free for life. Please help me obtain my first mortgage.

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