However, at its most basic level, the mortgage process involves only six steps: pre-approval from mortgage lenders, house shopping, mortgage application, loan processing, underwriting, and closing. Understanding each of these steps can help you weather the more complicated aspects of the process.
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
Once the underwriter has determined that your loan is fit for approval, you'll be cleared to close. At this point, you'll receive a Closing Disclosure.
The Rule of 28 – Your monthly mortgage payment should not exceed 28% of your gross monthly income. This is often considered the “Golden Rule,” and many lenders abide by it.
A mortgage servicer may not make a first notice or filing for foreclosure until the borrower is more than 120 days delinquent. The 120-day period under the rules is designed to give borrowers time to learn about workout options and file an application for mortgage assistance.
Capacity, Credit, and Collateral
The three C's of underwriting play an essential role in the underwriting process. Regarding Capacity, your debt-to-income ratio is the most important component. Ideally, you would like your DTI ratio to be at or below 40%. There are home loan programs that allow up to a 50% DTI ratio.
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
Conventional loans typically require a minimum credit score of 620, though some may require a score of 660 or higher. These loans aren't insured by a government agency and conform to certain standards set by the government-sponsored entities Fannie Mae and Freddie Mac.
Purchasing a home often takes four to five months. This includes two to three months to discover the perfect home. And another one to two months between contract and closure. However, keep in mind that this is only a rough average.
How long from clear to close is closing? Once your loan is approved and cleared to close, the mortgage team will have 3 days to finalize all of your closing documents so you're ready to complete the transaction.
The six phases of the loan process generally include pre-qualification or pre-approval, application, loan processing, underwriting, closing, and loan servicing. Pre-qualification or pre-approval helps establish the borrower's credibility and capacity to afford the loan.
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
The 35/45 rule
For example, let's say your monthly income is $10,000 before taxes and $8,000 after taxes. Multiply 10,000 by 0.35 to get $3,500. Then, multiply 8,000 by 0.45 to get $3,600. According to the 35/45 model, you could potentially afford between $3,500 and $3,600 per month.
This field is for validation purposes and should be left unchanged. With a $120,000 annual salary, you could potentially afford a house priced between $450,000 and $500,000, depending on your financial situation, credit score, and current market conditions.
The Bottom Line. On a $70,000 salary using a 50% DTI, you could potentially afford a house worth between $200,000 to $250,000, depending on your specific financial situation.
The 7 Day Waiting Period: Use the precise definition of Business Day here. Consummation may occur on or after the seventh business day after the delivery or mailing of the initial Loan Estimate.
“Most lenders follow the guideline that a borrower's housing payment (including principal, interest, taxes and insurance) should not be higher than 28 percent of their pre-tax monthly gross income,” says Winograd.
Credit is pulled at least once at the beginning of the approval process, and then again just prior to closing. Sometimes it's pulled in the middle if necessary, so it's important that you be conscious of your credit and the things that may impact your scores and approvability throughout the entire process.
Underwriters are the decision makers because they look at your application and will determine whether you receive approval. They usually have the final say as to whether you'll receive a loan or insurance policy.
As such, the next step that will occur is the mortgage underwriting process. The underwriter will assess the risk level associated with the loan and use the appraisal report to approve or deny a loan based on risk.