Loans

Loan Funding Process: How It Works

Becoming a homeowner is a fixture in the American dream. It is still a goal that so many strive to make happen for themselves and their families. Owning a home brings with it a whole host of benefits that you won’t have as a renter. There is no one to report to when you are a homeowner. You have the full power over your space and what you do with it.

If you are considering becoming a homeowner, it is important to know what you can expect from the buying process. Since this will be your first home, it will also be your first mortgage. Obtaining a mortgage loan is likely one of the most significant financial decisions you will make in your lifetime. Understanding the loan funding process from your loan application to your first mortgage payment will ease the way in your home buying journey.

Are You Ready To Become a Homebuyer?

It is essential to be sure you are ready to purchase your first home, and all that entails before taking steps to obtain a mortgage. Buying a home and taking on a loan as significant as a mortgage is an incredibly serious commitment that deserves thorough consideration and preparation. 

Here are a few questions you ought to ask yourself before pursuing a mortgage loan:

  • What are my reasons for purchasing a home?
  • Do I have a credit report that would get an affordable interest rate?
  • What other debts do I currently still need to pay back? Student loans? Auto loans? Other monthly installment loans?
  • Is there a reliable real estate agent that can help me?
  • How much can I afford to put towards a down payment?
  • What is a monthly mortgage payment I can afford? 
  • Can I afford all the other expenses involved in a home purchase? Furniture and decor? Moving expenses? Closing costs? A real estate attorney?
  • Is my budget compatible with a home that I would want to live in for the length of a mortgage?
  • Am I ready to shoulder the responsibility of caring for my own home?

While knowing you can afford the monthly mortgage payments is important, there are so many other things that need to be considered before buying a home. 

Loan Funding Process

A majority of ordinary folks will not have the cash to buy a house outright. Mortgages allow average Americans to purchase a home and slowly pay it off through monthly payments over a period of 10, 15, 20, or 30 years. There are many steps in the mortgage process before a closing occurs. We will walk you through step by step from the application to the closing date so you can know what to expect. 

Mortgage Application Process

Before you can get to the funding process, you will need to go through the application process for loan approval from a mortgage lender.

Good Faith Estimate

A loan officer can provide you with an initial pre-approval and good faith estimate. Prequalification will allow you to get a better idea of what loan packages might be available to you and what your payments could look like. The good faith estimate that the lender prepares with your pre-approval will include how much the buyer can borrow and the other costs associated with the loan. 

Loan Application Form

Once the buyer has found a house they like, they or their real estate agent will make an offer on the home by submitting a purchase contract and paying a good will deposit, also known as earnest money. The seller’s agent might request a specific earnest money amount or a percentage of the sales price. The offer in the purchase contract will always include a clause saying that the sale is contingent on final loan approval.

Loan Processing

In the loan processing stage of mortgage funding, the loan officer will run a comprehensive check of your credit report. The mortgage lender will confirm all the documents and information provided by you. If you have any adverse marks on your credit report, such as collection accounts, an equal housing lender may ask you for a written explanation.

A title company performs a title search on the property while the lender will attain an appraisal at the expense of the new owner. After the title company performs its search, you can obtain an owner title insurance policy. At the end of the loan processing, you will need to sign loan documents, including disclosures and a loan commitment.

Loan Underwriting

During the underwriting process, the lender will lock in an interest rate for your mortgage. This is typically locked in for a period of a week to 90 days before the closing date. It is at this time that you will need to meet any conditions specified by the lender before the actual closing. These final documents that need to be provided might include insurance policies or further proof of funds. 

Mortgage Closing Process

Before the closing date, the lender will prepare the final loan documents for the borrower to sign. However, there are a few more critical steps that the lender will perform before the closing documents are finalized and ready to be signed. 

Final Credit Check

Most lenders will perform another final check of your credit report, and employment status before the loan proceeds and the funds go to the escrow account. If all the funding conditions have not been satisfied, the loan could be suspended or denied at the last minute. This is why it is crucial to stay consistent with your finances up until the closing date of your mortgage. 

Loan Conditions

As mentioned above, all conditions must be met in the funding process before the closing date. If you have not completed certain lender-specific requirements during the underwriting process, you will need to complete them before you are able to sign the final loan documents. These conditions could be anything from additional documents on your income to independent appraisals of the property.

Notarization and Signing

Before the official closing date, you will be sent a closing disclosure. After you receive the closing disclosure, you will then be permitted to sign all the loan documents. You can sign all the necessary paperwork with a real estate attorney or title company agent present. 

Mortgage documents require notarization, which means you will need to be prepared to provide two forms of identification and sign some of the documents in front of a notary public. In many cases, you will find that the title or escrow company agent is a notary. If the title or escrow company doesn’t have a notary, you can find a mobile notary that will come to where you live or work. 

The signed documents will be returned to the lender for review so that the loan funds can be wired to the escrow company by the funding date. Once the home closing process is complete and you have covered all the closing costs, you will be a brand new owner of your very own home. 

Dry Closing vs. Wet Closing

When the funds are released to the title or escrow company depends upon whether the loan has a “wet closing” or a “dry closing.” Wet funding is far preferable as it means the funding date will occur on the same day of closing. 

When funds are not disbursed the same day as the signing of all the loan documents but go through a final review by the lender, that is referred to as a dry closing. Wet funding is not always available depending on state laws or the working relationship between the lender and the title company.

Helpful Tips For Finding Your Perfect First Home

Home shopping is as intimidating of a process as the loan funding process is. You are going to be inhabiting this home for 10, 20, 30 years, or possibly the rest of your life. It can be a war of priorities, trying to find the perfect place while staying within your budget. 

When it comes to home shopping, you don’t want to be in a rush. It is crucial that you take your time and consider every place you view. You want to account for every aspect from the neighborhood and schools to the appliances and fixtures. Every minute detail counts when you are looking for a good home that will enrich your life, not make it more difficult. 

Here are a few tips to help you find the perfect first home that will make you proud to be a homeowner:

Pick a Good Real Estate Agent

Having the right person on your side can make all the difference in your search for the right home. An excellent real estate agent will search high and low to meet your needs in your very first home. If you find a good agent, they will have the years of experience to narrow down your search in a way that makes picking a home a million times easier. 

An excellent real estate agent on your side will also make the negotiation and closing process go far more smoothly. You will feel significantly less like a fish out of water with a reliable person on your side. 

Be Thorough In Your Research

Before you even start the process of shopping and viewings, do your research and make it as thorough as possible. Read up on the different types of properties available, including condominiums and townhomes. Look up the neighborhoods you are considering and learn everything there is to know about them before settling on one. 

If you are considering a fixer-upper, do your due diligence on what will be required for renovations in both cost and labor. Always think ahead when purchasing a home. Since you are not renting, you want to be absolutely positive that you are looking to meet needs for not only right now but for ten years down the line. 

Stick To Your Budget

Falling in love with a place far outside your budget will have long-lasting effects on your monthly budget. It’s crucial to do your best to remain as close as you can to your original budget so that you don’t end up with mortgage payments that have you living paycheck to paycheck every month. Make your budget clear to your real estate agent and ask that they stick to it as closely as possible. Be realistic about what you can afford, and don’t compromise on it as a first-time homebuyer.

Use Your Imagination

When viewing homes, use your imagination to picture what your life could look like in that space. Switching on your creative brain will help you notice things that you might not have noticed otherwise. Using your imagination can cause you to pay attention to problems you might have overlooked or positives that you might have missed due to quick judgments. 

Imagine what your life would be like in that home and whether you could see yourself in that space five years or ten years down the road. It can be challenging for some people to fall in love with a space that is a blank canvas, like an uninhabited home which is why it is so essential to be creative when doing viewings so you don’t miss the potential of what you could do with a place. 

The Rewards of Becoming a Homeowner

Buying your very first home is an enormous step in a person’s life. It requires time, effort, and patience. But when you come to the end of the journey, and you are sitting in your beautiful new home, you will be immensely glad you’ve taken it because everything surrounding you, including the foundation on which you sit, is owned by you, and you alone. And that is a powerful feeling indeed! 

References:
The Funding Process for a Mortgage