The Loan Process

Section I

When You Purchase:

 Let’s break down the mortgage loan process into simple steps:

  1. Budgeting: This is like figuring out how much you can spend on a new toy or a vacation. You need to know how much you can afford to pay each month for your house.

  2. Pre-Approval: This is when a bank looks at your savings and income and says, “Okay, we can lend you this much money.” It’s like getting a ticket to start your house hunting adventure!

  3. House Hunting: This is the fun part! You get to look at different houses and imagine living in them. It’s like shopping, but for a new home.

  4. Choosing a Lender: This is when you pick the bank that you want to borrow money from. It’s important to choose a lender that offers good terms and treats you well.

  5. Mortgage Application: This is when you officially ask the bank for a loan. You’ll need to provide some information about yourself and the house you want to buy.

  6. Loan Processing: This is when the bank checks all the information you gave them. It’s like when a teacher checks your homework.

  7. Underwriting: This is when the bank decides if they will give you the loan. It’s like the final exam before you can get your loan.

  8. Closing: This is the last step! It’s when you sign all the papers, get the keys to your new house, and start your new adventure!

When You Refinance:

 The mortgage loan refinancing process steps are detailed as follows:

  1. Deciding to Refinance: This is like deciding to trade in your old car for a new one. You’re thinking about replacing your current mortgage with a new one that has better terms or rates.

  2. Applying for Refinance: This is when you ask the bank for a new loan. You’ll need to provide some information about yourself and your house, just like when you applied for your first mortgage.

  3. Choosing a Lender: This is when you pick the bank that you want to get your new loan from. It’s important to choose a lender that offers good terms and treats you well.

  4. Locking In Your Interest Rate: After you get approved, you can choose to ‘lock’ your interest rate. This means your rate won’t change before the loan closes. It’s like reserving a good deal!

  5. Home Appraisal: This is when someone comes to check out your house and figure out how much it’s worth. It’s like getting your car valued before you sell it.

  6. Closing the Refinance: This is the last step! It’s when you sign all the papers for your new loan. It’s like signing the papers to buy your new car.

Remember, buying or refinancing your mortgage is a big decision, but with the right information and help, it can be a smooth and beneficial process!

Frequently Asked Mortgage Questions

Section II

How do you qualify for a loan?

This is about what the bank needs to see (like how much money you make) before they decide to give you a loan. It’s important because it helps you know if you’re ready to get a loan.

When does it make sense to refinance?

Most folks refinance their loans to save some cash. They do this by getting a lower interest rate or shortening the loan period. Refinancing can also help switch from a loan with changing rates to one with fixed rates, or to bring all your debts together. Deciding to refinance can be tough because there are many reasons to do it. But if you’re looking to save money, here’s a simple way to figure it out: First, work out the total cost of refinancing. Then, figure out how much you’ll save each month. Divide the total cost by the monthly savings. This gives you the ‘break even’ time. If you plan to keep the house longer than this time, refinancing could save you money. Remember, refinancing can be tricky, so it’s a good idea to chat with a mortgage pro.

What’s the difference between pre-qualification and pre-approval?

Pre-qualification is a quick check to see if you might be able to get a loan, while pre-approval is a thorough check to make sure you can definitely get a loan. Knowing the difference can help you be more prepared when house hunting.

What type of mortgage should I get?

There are many types of loans, and this question is about finding the one that fits your situation best. It’s important because the right loan can save you money and trouble in the long run.

Will I save more if I go to a Direct Lender?

Actually, if you’re a smart shopper, you might find it better to work with a mortgage broker. They don’t add any extra costs because they do jobs that the lender’s employees would normally do. Plus, they work with lots of lenders (usually 25 to 30 or even more), so they can find the best deal for you. They can also find lenders who are experts in areas that others might avoid, like loans for people with low credit scores, loans for people who won’t be living in the property, or loans with little or no down payment. So, working with a mortgage broker could be a great move for you!

What are closing costs?

These are extra costs you have to pay when you get a loan, like fees to the bank. It’s important to know about these so you’re not surprised by extra costs when you get your loan.

Mortgage Glossary

Section III

Abstract (of title)

A written summary of the title history of a particular piece of real estate.

A provision of a mortgage or note which provides that the entire outstanding balance will become due and payable in the event of default.

A mortgage in which the interest rate is adjusted periodically, based on the movement of a financial index.

Repayment of loan by installment payments. As the payments are made, the debt is reduced so that at the end of fixed period or term, no money will be owed.

The annual percentage rate refers to the total cost of the loan, expressed as a yearly rate.

That part of the closing costs pre-paid to the lender at time of application to cover initial expenses.

A report made by a qualified person as to the value of a property as of a given date.

The value placed on a piece of real estate by the taxing authority for the purpose of taxation. Also called an assessment.

The purchaser takes over mortgage payments for the balance of the loan, assuming primary liability. Unless specifically released by the lender, the seller remains secondarily liable.

A mortgage with periodic payments that do not fully amortize the loan. The outstanding balance of the mortgage is due in a lump sum at the end of the term.

A short-term loan secured by the equity in an as-yet-unsold house, with the funds to be used for a down payment and/or closing costs on a new house. There is no payment of principal until the house is sold or the end of the loan term, whichever comes first. Interest payments may or may not be deferred until the house is sold.

The person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.

Money advanced by an individual (e.g. builder, seller, buyer, lender, developer) to lower monthly mortgage payments for a few years or the whole term.

The maximum interest rate increase allowable on an adjustable rate mortgage. Does not result in negative amortization. See Negative amortization.

The maximum payment amount increase allowable on an adjustable rate mortgage. May result in negative amortization. See Negative amortization.

A statement that shows ownership of property, stating that the seller has clear legal title.

The concluding day of the real estate transaction, when title and deed pass from seller to buyer, the buyer signs the mortgage and pays the purchase price and closing costs.

Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called “settlement costs.”

Replaces the HUD-1 Settlement Statement. It is the final disclosure generated by the lender for use in comparing the Loan Estimate against the final costs and fees for the loan scenario. It includes any credits and charges associated with the particular loan transaction.

A financial disclosure giving an account of all funds received and expected at closing, including the escrow deposit for taxes, hazard insurance and mortgage insurance for the escrow account.

An agent’s or broker’s fee for bringing the principals together and helping to negotiate a real estate transaction, often a percentage of the sales price or flat fee.

An agreement, frequently in writing, between a lender and a borrower to loan money at a future date, subject to certain conditions.

Refers to similar properties used for comparison purposes in the appraisal process. These properties will be reasonably the same size and location, with similar amenities and characteristics, so that the approximate fair market value of the subject property can be determined.

Ownership of a single unit in a multiunit building or complex of buildings. Along with this goes a share of ownership of the common areas.

A condition that must be met for a contract or a commitment to remain binding.

Any mortgage loan that is not insured by FHA, guaranteed by VA, of funded by a government authorized bond sale or grant.

To transfer real estate from one person to another.

The report to a prospective lender on the credit standing of a prospective borrower.

A legal written document by which title to property is transferred.

Failure to fulfill the terms as agreed to in the mortgage of note.

The difference between the sale price of a property and the mortgage amount.

A clause in a mortgage which gives the lender the right to require immediate repayment of a mortgage balance if the property changes hands.

The deposit money given to seller or his agent by the potential buyer at the time of the purchase offer. If the offer is accepted, the money will become part of the down payment.

A right to the limited use of land owned by another. An electric company, for example, could have an easement to put up electric power lines over someone’s property.

Anything that affects or limits the title to a property, such as outstanding mortgages, easement rights or unpaid property taxes.

The value in which the owner has in real estate over and above the mortgages against it. When the mortgage and all other debts against the property are paid in full, the owner has 100% equity in his property.

Funds and/or deed left in trust to a third party. Generally, a portion of the monthly mortgage payment is held in escrow by the lender to pay for taxes, hazard insurance and yearly mortgage insurance premiums.

A mortgage that has a primary lien against a property.

A mortgage with an interest rate and monthly payments that remain constant over the life of the loan.

Property, such as a hot water heater or plumbing fixture, that has become permanently attached to piece of real estate and goes with the property when it is sold.

An independent agency report required by the lender to determine whether a property is located in a flood hazard zone, which would then require a federally mandated flood insurance policy.

A legal procedure in which property mortgaged as security for a loan is sold to pay the defaulting borrower’s debt.

A fixed rate loan with monthly payments that start low, increasing by a fixed amount for a specific number of years. After that period, the payments typically remain constant for the duration of the loan.

Gross Income

Normal income, including overtime, prior to any payroll deductions, that is regular and dependable. This income may come from more than one source.

Insurance protection against damage to a property from fire, windstorms, and other common hazards.

An insurance policy that covers the dwelling and its contents in case of fire or wind damage, theft, liability for property damage and personal liability.

The HUD-1 Form, also known as the HUD-1 Settlement Statement, is used by creditors or their closing agents to itemize all charges and credits to the buyer and the seller in a consumer credit mortgage transaction.

Real estate that is owned for investment purposes and not used as the owner’s residence.

A charge paid for the use of money.

Interim financing, also known as bridge financing or a bridge loan, is a short-term financial solution designed to meet the immediate capital needs of a business or individual during periods of transition.

When the buyer agrees to make payments directly to the seller at pre-negotiated terms. The seller agrees to deed the property to the buyer upon completion of the agreement. The buyer becomes the owner of equity in this type of sale. (Also see Owner Financing.)

A legal claim on a property used as security for a debt.

Disclosure required within 3 days of loan application that lists all of the costs and fees associated with a particular loan scenario. The Loan Estimate replaces the Good Faith Estimate (GFE).

The relationship between the amount of the mortgage and property value, usually shown as a percentage.

The price at which a property will sell, assuming a knowledgeable buyer and seller, both operating without undue pressure.

A contract in which a borrower’s property is pledged as security for a loan which is to be repaid on an installment basis.

A written promise to pay a debt at a stated interest rate during a specified term. The agreement is secured by a mortgage.

The lender in a mortgage contract.

The borrower in a mortgage contract.

A loan in which the outstanding principal balance goes up instead of down because the monthly payments are not large enough to cover the full amount of interest due. Also called deferred interest.

A written proposal to buy a piece of real estate that becomes binding when accepted by the seller. Also called a sales contract.

A fee charged for the work involved in the evaluation preparation and submission of a proposed mortgage loan.

A purchase in which the seller provides all or part of the financing.

An acronym for payments to lender that cover principal, interest, taxes and insurance on a property.

A map of a piece of land showing boundary lines, streets, actual measurements and easements.

A fee paid to the lender on closing day to increase the effective yield of the mortgage. A point is one percent of the amount of the mortgage loan. Also called a discount point.

A charge paid to the lender by the borrower if a mortgage loan is repaid before its term is over.

A commitment by a lender to extend credit provided that specific conditions are met.

A preliminary assessment of a buyer’s ability to secure a loan, based on a specific set of lending guidelines and buyer representations made. This is not a guarantee or commitment by a lender to extend credit.

The interest rate charged by banks to their preferred corporate customers, it tends to be an estimator for general trends in short term interest rates.

The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

It is a term used for Reverse Mortgages which refers to the maximum amount that a borrower can receive from the loan.

Insurance written by a private mortgage insurance company to protect the lender against losses caused by mortgage default. This is commonly required on loan transactions involving less than a 20% down payment or equity position.

Guidelines used by lenders to determine how much of a loan a home buyer qualifies for. Often referred to as debt-to-income ratios (or DTI).

A real estate broker or sales associate affiliated with the National Association of Realtors.

The charges made by the register of deeds to record the legal documents.

Repaying a debt with the proceeds of a new loan, using the same property as collateral or security.

A loan issued on property that is already encumbered by an existing mortgage (ie: the first mortgage). The second mortgage is subordinate to the first.

The market wherein home loans are sold by the lender after closing to Fannie Mae, Freddie Mac or a variety of other institutional investors.

A map prepared by an engineer or surveyor charting a particular piece of real estate.

Ownership of a property. A clear title is one without any outstanding liens or encumbrances. A cloud on title refers to any outstanding liens or encumbrances which could impair the title.

A policy designed to protect the buyer or lender after closing from financial losses arising from any defects in the title that may have occurred prior to purchase.

A check of public record to disclose the past and current facts regarding ownership of a particular piece of property.

In some areas city, county or state taxes imposed when property passes from one person to another.

Federal law that requires lenders to disclose the terms and conditions of a mortgage, including the APR, based on certain charges incurred by the borrower. If the charges were $0, the APR would be equal to that actual interest rate on the loan.

The process of evaluating a loan application to determine the risk involved for the lender.

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