The Lending Process
It is likely that a home buyer will need to secure financing for their home purchase. In arranging for financing, a buyer/borrower will shop around for a loan and decide upon a lender to assist them through the process. A number of steps are involved in the loan process from qualifying for a loan, evaluating the buyer’s loan application, going through loan underwriting, and finally getting approved for a loan.
Choosing a lender
There are many options for a buyer to choose from in securing a home loan. Sources for a residential home loan include mortgage companies, commercial banks, credit unions, and savings and loan associations. A mortgage loan originator (MLO) is an individual that assists a buyer in the loan process and that takes a residential loan application, or offers or negotiates the terms of a residential mortgage loan. Mortgage loan originators are licensed in Colorado and are regulated by the Division of Real Estate, a division of the Colorado Department of Regulatory Affairs.
In choosing a lender, a buyer should also check on the different lender’s rates and fees, as well as the many different types of home loans that are available. A resource to help understand one’s rights and responsibilities concerning a mortgage is the Consumer Financial Protection Bureau.
Also, while mortgages exist in Colorado, the most common instrument used in the financing of real estate purchases is a deed of trust. While a mortgage involves only 2 parties, namely the borrower and lender, a deed of trust in Colorado involves 3 parties, namely the borrower, lender, and an impartial public trustee that holds title to the property until the loan is repaid.
Loan Pre-Approval
To get a “heads up” in the home buying process, a buyer can go to a lender to get pre-approved for a loan. This approval will show how much money a mortgage lender has approved to borrow for that loan, based on the borrower’s income, credit, and savings.
Loan Application
Once the buyer makes an offer on a home and has executed the sales contract, the completion of a full mortgage application is the first step in getting approved for a loan on that residential property. The buyer will present many required documents that involve their personal information, income, liabilities and assets to the lender. This information will then be reviewed by the lender to determine how much they will be able to lend and at what interest rate. The buyer will also receive a loan estimate document within 3 business days that will list the exact rates, fees, and terms of the home loan being offered.
Loan Processing
The loan processing stage is where all of the documents the buyer provided with the application are verified. The information on the application, such as bank deposits and payment histories, are verified. A loan processor prepares the file for underwriting, and all necessary credit reports, property appraisal, title search and tax transcripts are ordered. Once the loan processor has put together a complete package with all verifications and documentation, the file is sent to the underwriter.
Underwriting
During this stage, the loan and supporting documents will be submitted to the underwriter by the loan processor for review and approval. Simply stated, underwriting is a complex process involving the analysis of the borrower’s income, assets and credit to determine if they meet the requirements for the mortgage product being applied for and how much risk the lender will take on if they decide to provide the loan. The underwriter also considers the home that is being financed to make sure its value is sufficient, is habitable, and the property’s title can be transferred without any issues such as judgments, tax liens, or zoning concerns. The underwriter can also set certain conditions or requirements that may need to be met before the loan can be approved to close.
The Closing Process & Additional Terms
The Closing Process
The closing is that last stage of the real estate transaction. Typically, the closing takes place face-to-face at a title company, although the closing can also take place remotely with a closing agent coming to each party to review and sign their respective documents. At the closing, the parties provide their identification, all documents are explained to each party, disclosures are presented, proof of insurance is provided by the buyer for the home, any unresolved issues can be remedied, all the paperwork is signed, and house keys are delivered. The final loan documents containing the borrower’s interest rate, payment amounts and closing costs are also confirmed and funds are then transferred to complete the closing process. After the closing, documents required to be recorded will be sent to the county recorder in the county where the property is located.
Additional Terms
While there are many additional terms, conditions and responsibilities for a buyer/borrower during the lending process and closing of the real estate transaction, the obligations, responsibilities and process discussed above will help home buyers understand a little better what to expect during these stages of a real estate transaction.