The mortgage approval process involves loan pre-qualification, income verification, a credit check, a debt to income ratio check, an appraisal of the property's value, a property inspection, and lender underwriting. A down payment amount is usually required and agreed upon during the application process. Legal notices such as the Truth in Lending (TIL) statement are reviewed with the applicant during the beginning stages of the process.
Before shopping for a home, some buyers choose to get pre-approved for a mortgage. The lender verifies the applicant's income and credit history and pre-qualifies him or her for a certain loan amount. The buyer then looks for a suitable property and makes an offer based upon the pre-approval. The fact that the potential buyer is pre-approved for a mortgage is usually revealed during the buyer and seller negotiations, and can work in the buyer's favor.
If an individual decides to forego mortgage pre-approval, the first step in the mortgage approval process is to submit an application with a potential lender. The formal application process is initiated after a buyer locates and makes an offer on his or her property of choice.
Along with the application, a homebuyer is required to provide proof of annual income and submit to a credit check. The lender is looking for indications that the applicant is able to afford the loan amount and has a good repayment history. The applicant may be required to pay an application fee that covers the cost of the credit check and pending property appraisal.
During the application stage of the mortgage approval process, the potential buyer will indicate how much of a down payment he or she intends to make. While a down payment of 20 percent of the property's value is standard, there are some exceptions for first time homebuyers and non-conventional loans. The lender discloses the amount of down payment that is required with each available loan type as well as the expected closing costs.
The lender is required to disclose a Truth in Lending (TIL) statement and a Good Faith Estimate (GFE), which discloses the loan's annual percentage rate, what the total costs of the loan will be with the finance charges, the expected monthly mortgage payment, and whether the lender will make any money by transferring the loan to another financial institution. In addition, a real estate appraiser will conduct a formal evaluation of the property to ensure that its market value is not less than the amount of the proposed loan.
Underwriting is the next step in the mortgage approval process. Some lenders participate in automated underwriting, which speeds up the approval. Regardless of whether a traditional or automated process is used, lenders determine the applicant's credit risk and compare it against a risk classification system to either grant approval or deny the loan.
The final step in the mortgage approval process is the property closing. The closing date is negotiated by both the buyer and the seller. Depending upon the speed of the underwriting process, the closing can occur weeks or even months after the initial application is submitted. Property inspection failures, buyer and seller repair negotiations and appraisal issues are some of the delays that may affect the date of closing.