The Loan Process
When you need a loan, you are not alone!TM
To Help you Understand what to do, and What to Expect
There are many types of loans, ranging from home loans to commercial loans (for purchasing apartment buildings, retail property, purchase of a business, etc.). Each loan type has a different process.
Within each loan type, there are loan sub-types. By way of example, a home loan may be for a primary residence, second home, rental property, etc.
Furthermore, within each such subtype, there could be different purposes for the loan, such as for new purchases vs. refinancing a property you may already own. And this still breaks down to finer levels, based on the type of borrower; one with good credit, one with less than desirable credit, loans based on many cash assets, to loans relying entirely on one’s subject property income, etc.
To deliver useful information which can be used as a general guide, without providing an over-complicated picture that may be too involved to be useful, we have set out to describe the general process of financing a residential property from the borrower’s perspective. For instance, we have not covered the details regarding the tasks performed by escrow and title companies.
Please not that in practice, based on the specific borrower, and the loan applied for, almost invariably, there will be differences in what we have described here, and the actual process and activities that will take place on any given loan.
In this initial step, in case of a purchase transaction (vs. refinancing), the broker gathers high level information about the credit, income and assets of the borrower(s), and makes a more general determination as to what the borrower(s) can afford, and based on what type of loan product(s).
At this point in case of a purchase transaction (vs. refinancing) the broker can provide a pre-qualification letter to the borrower, which a borrower can use when placing offers on properties, to increase their chances of success in getting the offer accepted.
Using the pre-qualification information, the loan originator (broker/agent) together with the borrower, determine what loan products can be, and are likely (pending the more stringent loan approval process) available to the borrower.
At this point in case of a purchase transaction (vs. refinancing) the broker can provide a pre-qualification letter to the borrower, which a borrower can use when placing offers on properties, to increase their chances of success in getting the offer accepted.
In case of a purchase transaction, a more robust version of a pre-qualification process is the pre-approval process, where the borrower(s) not only provide the requested information, but they also complete a loan application, and provide proof of all parameters needed to qualify the borrower. By way of example, and if applicable, this could include pay stubs, bank statements, etc.
A pre-approval is more reliable, and typically more attractive to the seller(s) of the property, as well as the agents representing the seller(s).
A loan application is taken as part of both the pre-approval process, as well as a formal request for financing. This is a multi-page (and in case home loan, a standard form) document which captures all required information regarding the borrowers. This information is supported by supporting documentation, such a borrower tax returns, bank statements, etc., as requested by the lender.
If the term of the loan estimate are acceptable to the borrower, the borrower must sign an ITP (Intent to Proceed), at which time the loan broker will submit all the required documentation to the lender.
At this point the processing of the loan begins. The processor gathers all the necessary documents, including credit report, income (if applicable) and assets information, liabilities information and so on.
In addition, the processor will also order title report to make sure that adequate title rights can be transferred to the borrower in return for the monies paid by the borrower.
In conjunction with gathering and packaging all required documentation, an appraisal of the property will be conducted to make sure that the value of the property is in line with the lender’s expectations.
In more rare cases, and appraisal waiver may be obtained.
Once the loan “package” has been prepared by the processor, the package is submitted to the underwriter, who on behalf of the lender will evaluate the package and make a determination as to whether the loan can be approved.
Once all loan conditions have been met, an accurate version of the initial loan estimate will be submitted to the borrower to review and make sure that all figures are acceptable, and in line with the borrower expectations.
The loan originator (broker/loan officer) and escrow company are available to address any questions which the borrower may have.
The steps described here are very high level, and are meant to provide a high-level picture from the borrower(s)’ point of view.
It is not meant to be a manual, as a great deal more detail in involved in a loan process.
