Helping First Time Buyers Understand the Loan Process

As the largest single investment most families will make in their lifetime, a mortgage loan represents a payment plan that may take decades to complete. The process for qualifying for a mortgage loan is much shorter, but it requires several steps, and it often takes days or weeks to gain final approval and sign the paperwork for purchasing the home.

Qualifying for a Mortgage

It's common to seek pre-approval for a mortgage loan before starting a house hunt because
modern real estate moves quickly once an offer is made, and a buyer must have financing
quickly available to secure the property. Before starting the official mortgage loan process,
borrowers must figure out whether loan approval seems likely. A rejected loan application
can make it difficult for a borrower to qualify for future loans.

A lender may want a borrower to apply with a down payment in hand, as well as have a
certain loan-to-value (LTV) ratio. As described by real estate website Zillow, an LTV is a
ratio determined by the assets held by the borrower compared to the amount of money
requested for the mortgage loan. In the event a borrower's LTV is unfavorable for a
mortgage loan, the lender may ask the borrower to purchase mortgage insurance to
reduce the lender's risk in issuing the loan.

General Steps in the Mortgage Approval Process

Mega-lender Bank of America suggests that borrowers must follow ten steps to secure
a home loan, but the process isn't too complicated as long as a borrower knows the
steps in advance of applying for a mortgage. The first steps include submitting an
application, arranging a home inspection, and answering any questions the lender
might have about the application.

In addition to the home inspection the borrower should arrange, the lender will also
arrange an inspection of the house to ensure the value of the home is close enough
to the mortgage loan amount. If the inspection finds major problems, the mortgage
lender might reject the application because the loan amount would greatly exceed the
actual value of the home.

During the time the bank will spend determining whether to approve the loan or reject
the application, the borrower must adhere to certain behaviors. For example, it's unwise
to take out any new credit or create new debt during the process of applying for a
mortgage loan. It's also essential that the borrower reviews any documents sent by the
bank to confirm their accuracy.

At least ten days before all final paperwork is signed, the borrower must lock in the
interest rate with the lender, so all documents created for the final meeting between
the borrower and lender contain accurate figures. The conclusion of the loan process
is called the closing, and the borrower will sign several documents and provide a
cashier's check or wire transfer to cover the down payment and any required closing
costs.

Mortgage Loans Come With Many Requirements

In addition to the mandatory payments that the borrower must make on a monthly or
twice-monthly basis, mortgage loans also tend to come with a stipulation that the
borrower buys a homeowners insurance policy. Much like a lender offering vehicle
loans will require a borrower to obtain full coverage on car insurance for the duration
of the loan, a mortgage company will ask the borrower to insure the house against
damages during the repayment process.

Speaking with a Banker Helps Avoid Mortgage Rejections

There are few guarantees in the home buying process, and it may feel heartbroken
for a family to lose out on the ideal home because of a rejected mortgage application
or tardy loan approval. Conventional wisdom has long recommended that borrowers
save a down payment of 20 percent, but that figure has been called antiquated in an
article published by The Los Angeles Times. Before the search for a home begins,
the first step in getting a mortgage is speaking with a banker at a local bank for
details on the application process and likelihood of approval.