According to a recent study from Fannie Mae, most American consumers are confused about the mortgage loan process. If you’re thinking about buying or refinancing a home, you may find yourself in unfamiliar territory. What’s the first step? What are the requirements? How long does the process take?
If these questions sound familiar, then your first step might be to educate yourself about the lending and refinancing process. Use this quick guide to learn more about what to expect when buying or refinancing a home.
How to Begin the Mortgage Process: Find a Mortgage Lender
Whether you’re buying a house or looking to refinance your mortgage, your first step should be to locate a mortgage lender. At the very least, a lender can provide a mortgage pre-approval, which serves as an estimate indicating the maximum loan amount you qualify for.
A pre-approval letter will signify to the real estate agent and seller that you are a serious buyer and will also help you clearly define your budget. The lender will evaluate your financial history, looking at such information as:
- Your income
- Your credit report
- Your assets/savings
- Your employment history
- Your debt-to-income ratio
Your lender can also introduce you to different types of loan programs and help you understand the requirements of each. For instance, did you know that not every mortgage requires a 20% down payment or that FHA loans are available to those with credit scores as low as 500? There are even loans available for borrowers with no credit score.
Your lender can also provide guidance for the mortgage refinance process, helping you run the numbers to determine whether refinancing suits your current financial strategies.
Differences Between Purchasing and Refinancing a Home
The mortgage purchase process looks different from the mortgage refinance process — and for good reason. Each process has different goals, which is why you’ll want to understand the nuances of both.
Most commonly, the mortgage loan process is used to purchase a home. In this scenario, you borrow money from a bank or mortgage lender to buy a home. Once you complete the purchase, you’ll start to repay the mortgage, plus interest, throughout the term of the loan, which is most typically a 30-year mortgage.
The size of your mortgage loan depends on your financial history and how much you can qualify for. The best rates and terms go to those with strong credit and 20% down payment, although many loan options exist for those with low credit scores or no to low down payment.
Refinancing your mortgage means that you’ll replace your existing mortgage with a new one. The goal here is to secure a new mortgage with lower interest rates, favorable terms, or even tapping into your home’s equity for cash out or debt consolidation.
Existing homeowners pursue refinancing to reduce their monthly payments, shorten their loan terms, or pursue an arrangement known as cash-out refinancing. A cash-out refinance loan allows you to tap into your home’s equity to cover expenses like home remodeling, debt consolidation, or other major purchases.
Don’t forget that during the mortgage refinance process, you’ll have to pay closing costs just like when you completed the initial purchase. It’s important to make sure that the benefits you receive from refinancing your home exceed these costs to make the process worthwhile.
Owning vs. Purchasing a Home
It should now be clear that a major difference between the refinancing and mortgage purchase process lies in who owns the home. In the mortgage process, buyers are looking for a home to purchase. Refinancing requires that you already own a home with an existing mortgage. You will rely on a lender to provide a new mortgage with better loan terms.
How soon can you refinance your home after you buy it? That depends on the type of mortgage you have.
Many conventional loans have no waiting period before you can apply for a no cash-out refinance, while FHA and VA loans have a 210-day waiting period. USDA loans require a six-month waiting period. For a cash-out refinance you will need to wait 12 months and for conventional loans have at least 20% equity in your home. FHA and VA loans have higher loan-to-value restrictions; FHA allows up to 97% LTV and VA up to 100% in some cases.
Refinancing Can Be Quicker
The closing process involves the transfer of the home into your name as well as handling the administrative and legal documentation and fees associated with the sale or refinance of the home. This process from application to funding can take as long as 30-45 days, though many lenders streamline the closing process by using electronic forms and e-signatures.
When you are refinancing, the closing process can be significantly quicker because there’s less administrative paperwork involving a transfer of ownership, fewer parties to agree on terms, and generally fewer inspections and vendors are involved.
When Is an Appraisal Necessary?
The appraisal process establishes the current market value and condition of the home and ensures that the lender is not lending you more money than the home is worth. The appraisal also protects the homebuyer from paying more for the home than it’s currently worth. Although the appraisal is not a home inspection, it will disclose any visual defects that may require repair prior to the purchase and closing of the home loan; further protecting you, the new homeowner, from unexpected expenses.
An appraisal is always required for purchase and cash-out loans with FHA, VA, or USDA loan products. For conventional purchase and no-cash-out loans, FHA Streamline Refinance, and VA IRRRL loans, an appraisal may not be required. There are products available that waive the appraisal requirements. Generally, all cash-out loans require an appraisal to establish the value and condition of the property.
Steps in the Mortgage Process
If you are considering buying a home, we are sure that you have heard about the tedious process and tree killing amount of paper that is involved to obtain a mortgage loan. Let’s take a few minutes to talk further about the process and paper.
To secure a loan, you’ll first have to complete your lender’s mortgage application. The application is 5 pages of personal information that is required from you to start the loan review.
Information about the property you are using to collateralize the loan
Financial: Employment & Income
Financial: Obligations you owe
Financial: Assets you have available for down payment, closing costs, and reserves
Financial: Other real estate you may already own
Declarations (Your past financial history (first-time homebuyer, bankruptcy, foreclosure, lawsuit)
Demographic Information: Ethnicity, Sex, Race
Supplemental Information: Homebuyer Education & Language Preference
If you received pre-approval from the lender at this stage of the process, the pre-approval is based on what you have stated on the application PRIOR TO this information being verified. In today’s market, these types of pre-approval letters do not hold much weight with real estate agents or sellers.
It is always recommended to shop around for your mortgage lender. Not all lenders or mortgage loan officers are the same or offer the same products and services. Choosing the right lender can make the difference in how quickly and accurately the mortgage loan process happens, how much stress is involved with the purchase and mortgage loan process (less is better, right?), and how much money the loan you obtain costs over the life of the loan. Did you receive the best available product, price, and terms that you qualify for?
The processing of your loan is usually the most time-consuming step in the process. The mortgage loan processor makes sure you have all of the proper documentation organized and submitted for verification and validation BEFORE the loan goes to the underwriter.
All of the application requirements you completed must be verified. For most products you will provide the following documentation or a variation of these to the loan processor upon their request:
Copy of the Purchase Contract and all Addendums
Paystubs, W2s, 1099s, Tax Returns
Bank Statements/Verification of Assets
Verification of Rent/Mortgage
Divorce Decree/Child or Spousal Support Legal Agreement(s)
Your mortgage loan officer already pulled your credit at the time of pre-qualification. The processor will review and ask you for any supporting documents that may be required such as Student Loan Statements, prior Foreclosure filings, Bankruptcy discharge, pending lawsuit(s); proof others pay obligations that appear on your credit report.
At this time other important tasks are being completed by the Processing Team:
Escrow is opened
Property Inspections are ordered if required
Electronic verification of Employment, Income, Assets if you have authorized
Next Step: Your mortgage application and supporting documentation are submitted to the underwriter for review, who makes the key decision about final approval. In some cases, the underwriter can provide direct approval, which will allow you to move directly to closing on the property.
In other cases, the underwriters will issue a conditional approval, which requires you to take additional steps and/or provide additional documentation before the final approval can be issued.
What happens if your mortgage application is denied? Your underwriter will provide the specific reason(s) for the decline. The decline can be for many varying reasons, such as insufficient or inadequate credit history, insufficient or inadequate employment and/or income history, inadequate assets to close, unacceptable collateral (property).
These decline reasons are why you should seek out a Lender’s Underwriting Pre-Approval Letter prior to searching for a property to purchase. Who wants to find their dream home, put down a non-refundable purchase deposit with the seller, to later lose the home and your deposit because your loan was declined?
Underwriters can offer a conditional approval on your loan, which means that your loan will be approved as long as you can satisfactorily provide additional documentation or financial paperwork.
Think of conditional approval as good news. While it can mean a delay in the overall mortgage purchase process, it’s simply the underwriter’s way of verifying all the details to support your ability and willingness to repay the loan you have requested.
Once you provide the additional details requested by the underwriter, your mortgage application will proceed to the final underwriting stage. Depending on your lender and the current housing market, the entire underwriting process can take as little as a couple of days or as long as a few weeks. This underscores the importance of having your documents in order before you apply and getting the documents to the processor as quickly as possible when requested. You can literally shave days if not weeks off the time to close your loan and move into your new home.
You’re finally ready to close on your home. This is the fastest step in the process, so buckle up. A few days before this happens, your lender will send you an official Closing Disclosure. This document contains all the details of your loan that has been approved, including the required closing costs. It is your responsibility at this point to review the Closing Disclosure to ensure that what is approved is what you applied for and that the terms and costs are acceptable to you. You have 3 days to review and approve or reject the terms.
At the closing table, you will sign all the loan documents and pay the required down payment and closing costs in certified funds. If you have been approved for a cash-out refinance loan, you will have an additional 3-day rescission period to review the loan documents in their entirety, which means the borrower gets an additional 3 days to change their mind.
After all loan documents have been signed by all parties, all waiting periods have elapsed, funds have been brought or sent to the closing table, and Title has recorded the transaction, the lender will authorize the funding/disbursement of the loan proceeds to the appropriate parties. In a purchase transaction, this is when you receive the keys to your new home.
Purchase or Refinance with CrossCountry Mortgage
If you’re thinking about purchasing or refinancing a home, consider working with CrossCountry Mortgage. Our experienced team has helped countless consumers find the home of their dreams while securing rates and terms that fit their budget.
A refinancing decision can be a great way to carve out some breathing room in your monthly expenses, while a cash-out refinance might help you pay for home renovations to boost your property value.
When you’re ready to discuss your options, contact CrossCountry Mortgage, or start your online application today.