By Vera Chang, Branch Manager of General Mortgage
Jan 9, 2014
In an era of "high" interest rates, a mainstream view is that buying a house with cash can save a lot of interest. However, cash also has opportunity costs. Measured by the current popular CD (certificate of deposit) rates, the cost of cash is between 5-5.7%. That is the potential earnings you would loss if the cash is used to make a purchase. Therefore, most people, even with cash in hand, will choose to take out a loan to buy a house, after all, the difference between loan and deposit rates is only about ~1%.
If you choose to take out a loan to buy a house, the transaction usually takes about 15-30 days (cash transactions take 15-20 days). What happens within these 30 days? As the opening topic of 2024, Vera will talk in detail about the entire process of home loans, hoping to help many first-time homebuyers.
Step One: Start with a Pre-Approval Letter
The first step in buying a house is to find a loan officer for pre-approval, which is also the first step in the loan process.
The benefit of this is that you gain a full picture of your loan affordability before finding a property, avoiding situations where you find a house you like and sign a contract only to realize you can't get a standard loan and end up having to use a more expensive (higher interest rate, higher fees) special loan program.
Otherwise, the whole process can be very stressful.
At this stage, you should put the weight on if the loan officer can predict risks based off your financial status, help you prepare in advance, and mitigate risks.
Many loan companies check credit at the pre-approval stage, and we also recommend doing so. If any issues on the credit are discovered early on, Vera can help client repair credit (rapid rescore). And because we can do a soft pull, it minimizes the impact on your credit score due to multiple inquiries.
Step Two: Officially Start the Loan Application
Usually, after signing the contract, customers should promptly initiate the loan process. Here, some may ask, isn't it time to find the lowest interest rate loan and lock in the rate? There are two misconceptions here:
Is shopping around for rates correct? Yes, but it's best done in the first step when selecting a loan officer, ensuring there's enough time to complete the remaining loan work.
I want to lock in the rate before deciding who to get the loan from. Interest rates, like stock prices, change daily. A good loan officer can advise you on when it's most beneficial to lock in the rate, rather than locking it in prematurely.
Completing the loan application includes:
Filling out the loan application form - 1003 form (some customers usually complete this step during the pre-approval process)
Preparing loan application materials and uploading them to the online portal
Once the materials are completed and credit is checked, our setup team will prepare the loan package, a very long document for signing. Most of the content is standard templates, as required by federal and state laws to inform the homebuyer, with the initial loan estimate (LE) being the most noteworthy. The LE includes all possible charges regardless of home type, so it's usually much higher than the actual costs.
Step Three: Send Title Request and Contact Home Insurance
The title company (or transfer lawyer in many states, such as North Carolina, South Carolina, Georgia, etc.) will officially start the title work after receiving the title request from the bank/loan company and then order a survey according to the customer's request.
Meanwhile, Vera will ask the processor to contact the insurance broker for the policy as soon as possible, because insurance has been difficult to obtain those days, takes a long time to process, and sometimes we will require the insurance broker to correct typos or insurance types. To ensure timely transfer, we advance this step.
Step Four: Order Home Appraisal
Not every home requires an appraisal. Many times, buyers of primary residences can get an appraisal waiver (green light for home appraisal exemption). What are the benefits of getting a waiver? It not only saves $600-$700 in fees but also shortens the loan processing time.
This is where customers often fall into traps, as many loan officers tell customers, "Our company gives you an appraisal waiver." But how does this waiver come about?
Firstly, appraisal waivers are only available for full income verification loans, not for jumbo and Non-QM loans.
Secondly, appraisal waivers are determined by Fannie Mae and Freddie Mac, usually only for primary residences. If a loan company says they have an appraisal waiver, it will be available no matter which company you choose, and it's not a special benefit of a particular bank/company.
Of course, there are small tricks. Vera once helped a customer without an appraisal waiver obtain one by modifying some inputs.
The entire appraisal process takes 7-14 days, or 2-7 days for expedited service.
Step Five: Underwriting
After signing the initial package, the materials submitted by the customer will be sent to the credit auditor (underwriter), who will determine whether the application can pass according to the specific rules (guidelines) of various loan programs.
This usually takes 1-3 business days.
After the review, the loan officer will receive a conditional approval letter, which is the loan commitment often required by builders. Those customers who don't meet income or credit record requirements will be sent back. Loan officer will then need to restructure the loan by either choosing a different loan type or asking borrower to provide more documents. This usually tests the loan officer's expertise: whether the chosen loan program is appropriate, whether the income calculation is correct, etc.
Step Six: Supplement Materials
After receiving the conditional approval letter, the processor or loan officer assistant will help the customer prepare supplementary materials, usually including proof of source of large deposits, house deposit vouchers, and bank statements, etc.
Step Seven: Review Title Documents/Home Appraisal Report
Once all title-related documents are ready and the appraisal report is out, the credit auditor (underwriter) will carefully review these materials to ensure the property meets the loan conditions. This is one of the advantages of loans over cash purchases: having professionals help you check to ensure the house's title and condition are problem-free.
Step Eight: Loan Approval (Clear to Close aka CTC, Final Approval)
Before the approval is complete, there is much work to be done, including but not limited to:
Verifying the authenticity of the borrower's employment;
If it's a self-employed customer doing an income verification loan, we also need to contact the IRS to verify the authenticity of the tax forms;
Monitoring the customer's credit record to ensure no new loans are generated during the loan period;
Verifying whether the house is in a flood zone.
And so on.
Only when these countless small tasks are completed is the loan officially approved.
Step Nine: Prepare Signing Materials
Once the loan is fully approved (CTC), the doc team will reconcile with the title company/real estate attorney to ensure the numbers on the final closing disclosure (CD) are accurate. All third-party charges, including appraisal, HOA questionnaire, etc., will ultimately be based on the invoice.
Vera will also send the Final CD to the customer for review.
Step Ten: Customer Signing, Disbursement
Once the customer signs and we receive the signed materials, the funding team will check all signatures for compliance. Good transfer companies usually ensure one-time pass-through, and in rare cases, customers may be called back to the office for additional signatures.
After disbursement, the loan process is concluded.
Some may ask about locking in the interest rate. Why isn't this important step mentioned above?
Indeed, the interest rate is the most noteworthy part, but it doesn't need to be locked in immediately, especially during periods of rapidly falling rates. From the first step of submitting the loan application form to 10 days before the transfer, there's time to lock in. A good loan officer will always monitor the interest rate for you and find the right time to lock in, combined with the transfer date. How to lock in a good rate depends on the loan officer's sensitivity to macroeconomics, interest rate policies, and economic current affairs. We'll omit a lengthy explanation here but can discuss it in detail later.
Finally, a loan is a project involving multiple teams (banks/loan companies, lawyers, appraisal companies, survey companies, etc.), each step interlinked, none can be missed or delayed, otherwise, the transfer will be affected. Therefore, the responsibility and problem-solving ability of the loan officer are also particularly important.
From the above content, you can see that getting a loan is a very tedious process. In the article "Looking Forward to 2024" written before, Vera mentioned the popularization of AI in the loan field. Vera has been tirelessly looking for better ways to serve customers and speed up the process. For example, Vera is currently testing a tool that automatically recognizes documents, hoping we can make some breakthroughs in 2024.
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