How the mortgage process works, step by step on this weeks House Talk with special guest, Dan Williams, Vice President of Directors Mortgage.
Karen Malanga: Welcome and thank you for joining us for another episode of House Talk, a show where I interview the best people in real estate to demystify the complex world of real estate transactions and home ownership, so you can come to every transaction informed and prepared.
I’m your host, Karen Malanga, licensed real estate broker with RE/MAX Key Properties and years of experience helping people get into their dream home, sell a property, and always there to navigate the process.
Today’s show is going to be interesting. We are going to walk you step by step through the mortgage process. And I am so happy to welcome Dan Williams, Vice President of Directors Mortgage—and not just vice president of Directors Mortgage Bend. He is Vice President of Directors Mortgage. So we’re really lucky to have you here, Dan. And he’s going to start!
Dan, thank you for coming.
Dan Williams: You’re welcome. Thanks for having me.
Karen: So Dan, I want you to pretend that I’m a brand new buyer. I’ve never bought a home before. I’ve never sat down with a mortgage lender. What happens?
Dan: Well, it starts, obviously, we do an initial talk and get a feel for where you’re at, what your goal is. But based on that, in order to really make any decisions, we have to, as lenders, get a lot of detailed personal information from you. So it starts with a basic mortgage application.
An application is going to be you giving me all of your relevant info personally. Where do you live? How long have you lived there? Where do you work? How long have you worked there? What kind of income you make? Your social security number so we can look at your credit. Obviously, we have to see your credit scores. And that plays into the different products that are available for different scenarios.
It also allows us to see what kind of debts you have on your credit report that’s going to be from car loans, credit cards, other mortgages, whatever it may be. We can look at that and essentially start the process of going through and seeing what you can qualify from the ability to go shopping for a new home to maybe someone who’s gone through some challenges in their past and they need to work on a little bit of credit repair. All of that will come up in this initial [true one-over]—not just the initial conversation but taking the application and you providing us required documents.
Karen: You provide me—pretending it’s me again. Do you provide me with a checklist of everything that I need to provide?
Dan: Of course, exactly.
Karen: So, after I give you all my information, then what do I do? Or what do you do?
Dan: Well, yes. I’ll back up because you had a great point. Do I give you a checklist of the needed documentation. So you fill out the application just giving us your personal info. And on that checklist, it’s always going to be things like your last two years of filed taxes. It’s going to be, if you’re employed, W2’s and recent pay stubs, copies of assets, so that we know where your down payment is coming from—from bank accounts, investment accounts, retirement funds, wherever it may be. And that can be down payment. That can be reserves that strengthens your position because you have money behind you in case of hiccups.
Karen: Can you explain what reserves actually means to me?
Dan: Yeah, reserves are…
Karen: Remember, I’ve never bought a house before.
Dan: You bet! Reserves are the money that we see that you can get your hands on in case of rough circumstances…
Karen: …like a loss of job or…
Dan: … a loss of job. A reserve say for one month would mean you have enough money to cover one month of your bills or your mortgage payment with no other income sources. It’s sitting in your account.
And there are some products that require a lot more—your bigger jumbo loans where people are buying homes that are over the conforming limit which, in this area, is $453,100. When you go over that limit, now your reserved requirements generally will go up. And so, maybe you’re buying a multi-unit home, and you want to live in one of them and rent the other ones, again, those things start driving different reserve requirements that a lender would have on you to qualify for the loan.
Karen: So basically, I’m opening up my whole financial world to you?
Karen: And then, after you’ve looked at my finances, you can decide if I’m going to be a qualifier for maybe an FHA loan or…?
Karen: What comes next after this? Do we find a property now? What happens?
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Dan: Well, through that process, that allows us to offer you that pre-approval. And people know that generally, especially in a market this hot like Bend where things are moving and grooving and people need to be prequalified in order to even go put an offer in on a home, we get you pre-approved basically through this process. And we tell you, “Here’s the max that you can qualify for.” And we give you these parameters.
Now, you’ve got this letter in hand. They work with you. Obviously, as the realtor, going out looking at homes knowing that they can afford and qualify to buy these homes.
Karen: It really helps give people a feeling of confidence because they know that they’re not wasting their time.
Karen: They know what they can afford. And they already know that they’ve started the process.
Karen: It really helps us when we present an offer.
Dan: Yeah, it helps a lot.
Karen: So now, okay, let’s say I find a home. Now what happens?
Dan: So, from the lending side, from our process side, there’s several things that are going on behind the scene. We are going to order verifications of employment. So a borrower, when they give us their information, one of the things they sign is a borrower’s authorization for us to see and gather other personal info.
Dan: It allows us to talk to their employer if they’re employed and say, “What does this person earn? How long have they been there? What are their bonuses like? Do they earn overtime? Have they averaged it for a few years?”
There’s a lot of things that we see on these verifications. So we’re ordering these type of informational, what we call, “order-outs” on the backside to get us in a position to be able to move forward with you.
So, you’re going out. Your borrower’s pre-approved. They find a home, they make an offer. It gets accepted. Now everything is really moving.
So we’ve gone through. We’ve scrubbed through the file. And there’s possibly things that we know did the provider does enough to get them preapproved, but they really didn’t give us everything we need. Should it go through a full under-writing process?
So, we’re going to tell them, “Hey, you gave us a certain amount of information on your accounts. But we need all the pages like your bank statements…”
Karen: Oh, like they send you the front page and not pages one through ten. Even if 10’s blank, you need page 10.
Karen: We got nine of the ten pages. And page 10 is blank. And like we talked about the last time we spoke, we need them all. So if there’s 10 pages, we need 10 of 10. If there’s schedules on their taxes that maybe they didn’t include, we need to see those. We have to see all of it.
So, we’re going to go back and make sure that everything that we requested is all there. And then, that loan is put together and goes through what we call processing.
Karen: What is processing? Remember, this is my first loan. So what is processing?
Dan: Yeah, exactly. Processing is making sure that everything that we know an underwriter is going to need is put together, it’s in order, we’ve pre-scrubbed the income again, made sure that all these numbers qualify. There’s no red flags that things will necessary will be an issue in underwriting.
Underwriting is where you’re getting your actual approval. And they’re actually now scrubbing detail down to the penny, looking at every little line item, and making sure that someone qualifies based on the program that they’re requesting, the amount of money they’re putting down, is their source of down payment acceptable, all these little things in line.
And now, an underwriter comes back and issues us an approval.
Karen: Through all these process, before they go to underwriting, I mean we have to go back. They’re writing an offer, the offer is accepted. So you’re also looking at the property as well. Is this property going to qualify for the loan, correct?
Dan: Absolutely. Correct.
Karen: Okay. Well, it’s time for us to take a break. You’re listening to Karen Malanga, House Talk, and Dan Williams, Vice President of Directors Mortgage. And we’ll continue on with what goes on with the mortgage process.
Karen: Hi, this is Karen Malanga. We’re back with House Talk and Dan Williams, Vice President of Directors Mortgage.
Dan’s been explaining how the mortgage process works and I’ve been pretending to be a first time home buyer. So Dan, where did we leave off?
Dan: We left off with you asked a good question about the property.
Okay! So, when a loan is underwriting which is what we were talking about—and that’s an underwriter actually going through every detail from sourcing down payment to credit to debts to the program that they actually are requesting—one of the other things that we have to look at is the home itself that they made the offer on.
So, part of that original process, when I talked about order-out’s and such, is we order an appraisal. It’s an obligation on the buyer upfront that, once they’re satisfied, they’ve usually ordered a home inspection, they’ve gone through, they’re satisfied with the quality of the home, and now an appraiser comes in, and what they’re talking about is the value and the marketability of the home. Those are the things that an appraiser is basically addressing. They’re not saying, “Does the furnace work or not?” That’s an inspector.
Karen: Sure. So Dan, that is something that the buyer has to pay for, correct?
Dan: Correct, yes. They pay for that upfront. And that is one of their costs of the loan, the actual appraisal.
So, we get an appraisal back. And what an appraisal does is it goes through and it basically is pulling the most similar homes that have sold in the area within a recent time, within a concise area that represents that home’s market. And it also represents several things—the size of the home (square footage is considered), they consider room counts, location. All of those things play in. And an appraiser comes back and says, “This is what the house is worth.”
Karen: And so, what you’re really doing there, Dan, is you’re solidifying the fact that the contract, the price that the buyer has agreed to pay the seller is a legitimate price for the home?
Dan: Correct. And a loan is always going to be based on the lower of the agreed upon sales price or the appraised value. So if the buyer agrees to pay $400,000 for a home, but it appraises at $390,000, you have a little difference there that has to be addressed. The maximum that we would lend is going to be based on $390,000 minus the down payment. The rest would be the loan. And that’s the norm.
Buyers can still pay. They can agree to actually pay more than the appraised value. if they believe that that house is worth it, and that’s where they want to live, that’s their little castle, they can do that. But that’s a separate agreement that they agree to pay over the actual appraised value. Our loan is still based on the appraised value in this case.
Karen: Uh-huh… so again, we’re speaking with Dan Williams, Vice President of Directors Mortgage. And so Dan, take us from that appraisal process. Now where do we go?
Dan: Sure! Okay, so the underwriter reviews that. They have ways to look at what they consider the risk level of the value of that appraisal. The appraisal is that appraiser’s opinion based on a lot of time and knowledge and licensing and requirements and all those things. But an underwriter still looks at that and assesses is that a solid appraisal. Do we agree?
If they do, then great, it moves forward without really any issue. If there are differences of opinion, there’s a lot of things you can do—field review the appraisal, second appraisals, automated valuations. There’s lots of different things that, as a lender, we can do to come to an agreement on what that value is.
So, that becomes part of that approval. And so we will then get this approval back from the underwriter with a list of conditions. Maybe one thing on the approval led to another question that needs to be answered. And so generally, that’ s when we’ll reach back out to you, the borrower, and say, “Hey, we need X, Y, Z from you to help explain this.” Maybe we need just a signed letter of explanation on what happened here, here and here.
And these are the things that we do. We go through that process. All of those items are gathered and resubmitted back to underwriting. So you go from what we call a conditional approval into a final approval.
And a final approval now is a great thing. Once you get a final approval, that means everything is signed off. And we are now ready to go to the next phase of the process which is docs.
Dan: …the documents that you’re going to sign when you go to escrow and to the escrow title company. And in this area, we are what they call a “dry state,” which means that you basically sign all of your documents, and that package is basically reviewed by the escrow company. They balance all the figures with us as a lender, make sure everything is the same and right to the penny, on the money there. And that package is sent back to us.
Our funders then review that information, agree that everything is right. And then we order the wire. That’s the final stage. We order the wire and send that money to escrow who then disburses the funds. They pay off the seller any existing liens that may be there. And everything is balanced out to the penny.
And now, the final stage would be escrow receives that, disburses funds, and they record with the county that now this is a new legal lien on this property, here are the new legal owner. And you get the keys. And it’s…
Karen: And it’s a big smile.
Dan: Happy time!
Karen: This is so interesting, Dan. So again, this is House Talk with Karen Malanga and Dan Williams, Vice President of Directors Mortgage. And it’s time to take another break. We’ll be right back with some hiccups that can happen along the way.
Karen: Hi! This is Karen Malanga. And we’re back with more on House Talk. I’ve got Dan Williams, Vice President of Directors Mortgage. And before the break, we took you through the steps of the mortgage process. And just with the experience I have, and I know with the years of experience that Dan has, I’ve rarely had a transaction that did not have a hiccup.
And it could be in the beginning. It could’ve been something on a preliminary title report, or it could be something that the borrower or the seller do during those 30 to 45 days.
Dan: Well, there’s things that can always come up and surprise you, like a surprise lien that’s on there that has to be addressed. Maybe the previous owner had some worked done and didn’t quite score up with that contract or…
Karen: Yeah, we see that a lot.
Dan: And magically, there’s a contractor’s lien on the property. And it has to be addressed.
Another one that kind of shows up that people don’t think affects their ability to buy a home are IRS liens. They have taxes that they did not get paid. And so a lien shows up over time. Usually, the borrower is aware, but they’re not aware of how it’s affecting their ability to buy a home. And unfortunately, things like IRS liens, judgments through court findings, those things can supersede our position as a lender. So when we give you a loan, we have a lien on your property to secure the loan.
Karen: And you want to be in first position.
Dan: And we want to be in first position as far as a normal loan would go. And things like IRS liens would supersede our position.
Karen: And property tax liens too, right?
Dan: Exactly, exactly. So, we don’t want to be in second position on this huge amount of money. We want to be in first position. So things happen that you have to address. You have to end up getting judgments paid, or get an IRS lien paid, or at least be in a payment plan with a history of payments.
And just so you know, a little sidenote on that, if you have a payment plan with the IRS, as long as you’ve made three payments on time, we will allow that. And we put that into your debt ratios as part of your obligations. That’s one area.
Of course, we addressed before—the one we talked about last time…
Karen: Yeah, on another show, yeah.
Dan: …things that come up that can really blind side a loan in the middle of the process, and that is a buyer’s excited, they’ve got a home on the line, but they know they need a new washer and dryer, and they boogie on down to the local store, and they buy themselves a new washer and dryer, but they buy it on credit and/or even cash. And that was part of the reserves that they needed in order to qualify and get an approval.
So, they either liquidated some of the cash that they needed and/or they had their credit pulled again (which generally will lower your score a little bit), you add a new debt (which definitely impacts your score), and you have a new payment (which impacts your debt to income ratios).
So, those are the kind of things that we as lenders tell you, “Man, be upfront with us. Communicate, over-communicate. Ask. Do not go buy a car.”
Karen: Don’t change jobs.
Dan: “Don’t change jobs. Don’t take a job that you’ve taken that you’re super good at, and you’ve done it for years, and you know that if you started your own company, that you’d be even more successful and make more money.” Don’t do that, not in the loan process. Wait that 30 to 45 days, and let’s qualify you on your job because when you start a new business, you need a minimum of two-year history in order to use that income.
So, anyway, again, this is Dan Williams with Directors Mortgage. And Dan, when I sit down with you—I’ll go back to being that first time home buyer again buying my first house…
Karen: You give me my checklist of all the documents that I need to provide to you, open up my financial world. And do you also give me a checklist of what not to do during the next 30 to 45 days?
Dan: That’s right. We give you a whole list of do’s and don’ts.
Dan: We want to guide you. We want you to know, without guessing, that “Hey, this is fine. No problem. And this area, avoid like the plague.” We want you to not be guessing. You’re way better off being just very open, letting us know what you’re doing and thinking, and we can guide you. We can save you so much heartache and headache in that process and give you a smooth process to get to point B and own that home.
Karen: Dan, I’m sorry. We’re going to have to wrap it up. This has been an amazing amount of information.
Karen: And we’re going to have to have you back again!
So, this is Karen Malanga, broker with RE/MAX Key Properties. And thank you to Dan Williams, Vice President of Directors Mortgage. And thank you so much to you listeners for tuning in to House Talk.
And I’d like to leave you with a quote today. One of my favorite quotes is by Mark Twain. And he said: “Buy land. They’re not making it anymore.”