An interest rate is the percentage of your existing principal loan balance you pay your lender in exchange for borrowing money to purchase a home. The interest rate is used to calculate your monthly mortgage payment. The higher the interest rate, the higher your monthly payment will be.
Once you have found a home and are under contract with the seller, your lender will send you a Loan Estimate. This form is the same for every lender and helps the applicant compare different offers.
You will see a breakdown of the loan amount, interest rate, origination fees, closing costs, loan terms, expected monthly payment, property taxes, and insurance. It will also state how the interest rate and monthly payment may differ in the future.
If you are happy with the Loan Estimate, it is time to choose a lender and enter the processing and underwriting stages.
What to Expect in Processing
Mortgage processing is when your personal financial information is collected and analyzed to ensure that all proper documentation is in place before the loan paperwork is sent to underwriting. This is a very important step in the mortgage process as it helps identify your current financial obligations and ensure that you are comfortable obtaining new debt.
During processing you will need to provide additional documentation or financial verification. This type of verification will happen many times during the mortgage process. You will have to verbally verify your employment and provide evidence that you have not stopped working since submitting your application. A verification of deposit form will also be needed from your bank to verify your account balance and financial history.
In addition to providing additional documentation, a home inspection and home appraisal will be conducted. A home inspection is a visual evaluation of a home’s overall condition and accessibility. This on-site evaluation is completed by a licensed inspector who will check the performance of the home’s roof, foundation, windows, doors, floors, ceilings, and walls. A home inspection can also determine the activity and performance level of a home’s water heater, HVAC system, plumbing, and electrical.
A home appraisal will also occur and is an important part of processing a home loan. An appraisal is an expert’s unbiased assessment of your home’s current market value. The appraisal will base this number on the home’s square footage, number of bedrooms and bathrooms, lot size, location, and nearby homes. The appraiser tells the lender what the home is worth so that they can determine if the amount of money requested is appropriate for the home.
What to Expect in Underwriting
Underwriting is a thorough evaluation of your personal financial information and supporting documentation by a licensed underwriter. This process enables the lender to check your eligibility, confirm the information provided, and decide if you are approved or denied for the loan you applied for. An underwriter will ensure that you do not close on a mortgage that you can not afford by going through the following steps:
- Look into your credit history and pull your credit report. They will look at your overall credit score and look for any potential risks.
- Order an appraisal and make sure that the amount that the lender offers matches with the home’s actual value.
- Verify your income and employment
- Analyze your debt-to-income ratio (DTI) to ensure that you have enough cash to cover your monthly payments, taxes, and home insurance.
- Verify your down payment and the amount of savings you have to make sure you have enough saved to supplement your income.
Conditional Approval and Commitment Letter
When your loan gets conditionally approved, it basically means that the mortgage underwriter is mostly satisfied with your application. Despite this provisional approval, there may still be a few aspects of your application that need attention. Once all issues or questions are sourced, the loan file can move to final approval. After the final approval, you will receive a commitment letter from your lender. This letter will indicate your loan program, loan amount, loan term, and interest rate.
Ready To Close
When all remaining questions have been answered and all finances are verified, the underwriter will give a final approval and “clear to close.” This means that all conditions have been met and lets your lender schedule your closing. You are now fully approved to own a new home.