Watch Gordon's video: How the Home Loan Process Works

The Home Loan Process

Shown above are the steps in the home loan process. Generally speaking, they can be grouped into three stages: preparation, property search, and escrow.

1. Preparation

Before shopping for a property it's important to know what you can afford. To make the most of your time you'll want to focus on properties in your price range. Getting preapproved for a loan will let you know your maximum purchase price. Here are the steps required for a preapproval:

Loan Application with Supporting Documentation

All lenders require that you fill out a standard Residential Loan Application. The application captures basic information about your employment, assets, debts and other personal information related to your ability to repay a loan. Although it's easiest for us to complete the application together, feel free to download it here and look it over.

Once completed, the loan application provides basic information I need to assess your financial situation. It also lets me know exactly what paperwork to ask you for. In order for me to issue a preapproval, I'll need to document everything we've included on the application. . Here's a list of what most lenders require:

Income Documentation

Salaried borrowers:

Copies of your current pay stubs, spanning one month and including year-to-date figures.

Copies of your W-2s for the previous two tax years.

Self-employed borrowers:

You don't have to own your own business for lenders to view you as self-employed. If your situation can be described as one of the following, lenders will treat you as a self-employed borrower:

Report your income on Schedule C of your tax return (sole proprietorship)

Receive most or all of your income as commissions or bonus

If you're self-employed here's the documentation required:

The most recent two years of personal tax returns (Federal only)

Partnership or corporate tax returns for the most recent two years (depends upon how your business is structured).

K-1's for the most recent two years (if incorporated)

W-2s if you pay yourself a salary from your business

Year-to-date profit and loss statement for your business

For self-employed borrowers lenders require that I average your income over the last two years. This means I calculate your monthly self-employed income by adding what's shown on your last two year's returns and dividing by 24 months. This applies even if the prior year reflects only a partial year's earnings. If your income declined from the previous year, I'm required to exclude the prior year's income and divide the current year's earnings by 12 to arrive at your monthly income.

Please note: If your tax returns reflect self-employed income for only one year you'll probably need to wait another year before purchasing a home. However, it's sometimes possible for me to gain permission from lenders to use only one year's self-employed income documentation. If your circumstances warrant this I can find out if this option is available to you.

Asset documentation

Lenders want to make sure you have money in your accounts for your down payment as well as closing costs and the prepaid expenses involved with purchasing a home. If your money has been in your accounts for at least two months and is reflected as such on your asset statements, lenders will consider the funds "seasoned". On the other hand, if they see a large deposit in one or more of your accounts they'll want to know the source and will ask for it to be explained.

Lenders want to make sure the money you're using for your down payment is your own and not a gift or loan from someone else. Although gifts are allowed, in most cases lenders want a certain minimum amount (usually 5% of your down payment) to be your own.

Here's what's required to document your assets:

The most recent two month's worth of account statements for your bank, brokerage, and retirement accounts -- all pages.

If money for the down payment on your new property is coming from the sale of an existing property: a closing statement from the sale.

If money for the down payment is coming as a gift: a gift letter from the donor as well as an asset statement documenting the funds.

Credit Report

I will run a credit report combining results from each of the three major credit reporting agencies and showing three individual credit scores. Lenders generally take the middle score of the three when evaluating your credit history. The report will also show specific information about your open credit accounts, closed credit accounts, derogatory credit accounts (late payments or collections), and other public information such as bankruptcy or tax lien filings.

Your credit history is extremely important to lenders, especially these days. It's not enough just to have a good score, lenders also want to make sure you have adequate history on your credit report. Generally, they want to see four accounts currently open, each for at least two years. However, if your report doesn't meet this minimum -- I can usually get permission from lenders to allow a more limited credit history if needed.

It's important to run your credit report early in the process so we'll have time to correct any mistakes that may exist. This will let us increase your scores so you can save money and have access to better loan options.

Credit scores range from 400 to 850. The chart below shows descending score ranges and their effect on your ability to get a loan.

Best	740 +	Entitles you to the best rates and lending programs available.
Very Good	720-739	Very good but may limit your loan options.
Good	680-719	Still good but may limit loan options and increase your rate.
Fair	660-679	In almost all cases will increase your rate and limit your loan amount.
Poor	Below 660	Definitely will result in a higher rate, larger down payment required, and possibly other restrictions.

Pre-approval and Loan Options

Now that we've completed the loan application, gathered your documentation, and run your credit report you're ready to be preapproved. We'll discuss what you can afford given your income and down payment. Based upon this I'll provide you with a spreadsheet showing different loan options for your purchase. You can try inputting different purchase prices or down payments to see how this will affect your monthly costs. Together, we'll decide what will work best for you. Once we do, you're preapproved and you are ready to look at property with your real estate agent.

2. Property Search

As you search for homes with your agent you may find yourself looking at properties above the price range we've discussed. Or, you may end up looking at property types you hadn't anticipated. For example, you may have planned to look single-family homes but now you're seeing condominiums you like. Similarly, you may become interested in TIC units or multi-unit buildings. That's okay, by staying in touch throughout the process I can look into increasing your maximum purchase price or see if other property types are an option for you.

Offer Accepted

When you've found the right property you and your agent will write an offer. I'll give you a preapproval letter specific to the property to accompany your offer. This will let the seller and listing agent now you're preapproved for financing. Hopefully, your offer will be accepted. If it is, we can move to the next stage in the home loan process. If not, we'll stay in touch as you continue your search.

3. Escrow Period

Once your offer is accepted time is "of the essence" as they say in real estate. You'll have a purchase contract signed by the seller which commits you to closing within a specified time frame, usually 30 days. Because we've done all the work upfront we'll be ready to hit the ground running.

The first thing I'll do is lock in interest rate for you. It's only possible to lock in an interest rate after your offer has been accepted. The lender needs to associate a property with your request to lock in a rate. Rates change daily and different lenders have the best rates on different days. I'll make sure I find you the best rate available when you need it. To do this I'll compare rates among the dozens of lenders I work with.

Once I've found the best rate for you I'll lock it in for the amount of time you need to close your purchase. By locking in a rate the lender is committing to holding it for you through your close of escrow

Submission to Lender

After I've locking in the rate I'll send you your loan application and several disclosures for your signatures. I'll also get an estimate of fees from the title company, lender, and any other service providers we may need to use and provide these estimates to you in the form of a Good-Faith Estimate (GFE). I'll go through all fees with you in detail. Once you're comfortable with them you'll sign an acknowledgment that you've received the estimate.

Now that your rate is locked and your signatures are on all the required paperwork, I can send your loan to the lender.

Lender Underwriting

The underwriting process begins as soon as the lender receives your loan application and supporting documents. Your application will be reviewed for completeness and then to confirm everything meets lending guidelines.

Lenders make sure you, the borrower, are qualified to get a loan. But, they also want to evaluate the property since it serves as collateral for their loan. To this end, the lender will also want to review a title report on the property and an appraisal. A title company will supply the title report and I'll order an appraisal as soon as I'm allowed to by the lender.

Conditional Approval Given by Lender

Once the lender has reviewed everything it will issue a conditional approval. A conditional approval will let us know what questions it has and will also include requests for additional documentation. We'll work together to get what's needed as quickly as possible. If the lender is busy it may take a few days for it to review what we've sent. Since the clock is ticking it's imperative we get everything in quickly.

While we're busy satisfying conditions, the appraisal will move forward. The appraisal is one of the most important parts of the loan process. The lender wants to make sure the purchase price you've agreed to is a fair market value for the property. It also wants to make certain there aren't any physical issues with the property which might affect its value.

Final Approval Given by Lender

When the lender has approved of everything it will issue a final approval. At this point we can be fairly certain your loan will close without a hitch. There will always be a few outstanding conditions but, hopefully, we'll have taken care of the big items for the lender already.

Loan Documents Sent from the Lender

We're now ready to order your loan documents from the lender. The documents will be sent directly to a title company where escrow is open for your purchase. The title company acts as an independent third party. It follows instructions from all parties involved in the transaction and administers an escrow account through which all funds are received and disbursed.

An escrow officer at the title company will prepare a closing statement. The closing statement shows all of the debits and credits associated with your transaction. This is where a final accounting of your closing costs will appear. The costs shown on the statement should closely match what you've already received from me in the initial or revised good-faith estimates I've provided.

You'll go to the title company's offices to sign the loan documents with an escrow officer. The escrow officer's responsibility is to make sure everything is done according to the lender's instructions. He or she will be able to answer any questions and I'll be available to help as well.

Loan Documents Recorded and Purchase Closes

After you've signed the documents the title company will send them back to the lender. If everything has been done correctly the lender will send funds for the loan to the title company and allow your purchase to close. Your purchase can now go "on record" in the county where your property is located. This means your name will be recorded in public records as the owner of the property and the county will also have a record of the loan your lender provided. Congratulations! You're a homeowner.