Types of Mortgages
Conventional, FHA, and other types of mortgages
There are several different types of mortgages you should be aware of before starting the house-hunting process.
- Conventional/conforming – This is the “standard” mortgage, and typically refers to loans that conform to Fannie Mae and Freddie Mac’s lending limits and standards. Conventional mortgages are not guaranteed or insured by the federal government.
- Jumbo – A jumbo loan is a mortgage that isn’t guaranteed by the government, but exceeds the Fannie Mae and Freddie Mac lending limits. A jumbo loan is a type of non-conforming conventional mortgage.
- FHA – FHA mortgages are insured by the federal government, and therefore have looser credit standards than conventional mortgages.
- VA – VA loans are mortgages that are guaranteed by the U.S. Department of Veterans Affairs. For those who qualify, VA loans have no down payment requirement and several other advantages.
- USDA – Designed to encourage rural home buying, USDA loans have no down payment requirement, but also have some drawbacks, such as relatively high fees.
You can think of pre-approval as a kind of financial pre-screening. It has “pre” in the name because it happens on the front end of the mortgage loan approval process, before you start shopping for a home.
Pre-approval is when a lender reviews your financial situation (particularly your income, assets and debts) to determine if you’re a good candidate for a loan. They’ll also tell you how much they are willing to lend to you, and provide you with a pre-approval letter to that effect. The lender might also check your credit reports and scores at this stage.
This a beneficial step in the mortgage approval process, because it allows you to narrow your home search. If you were to skip the pre-approval and go straight into the house-hunting process, you might end up wasting time by looking at homes that are above your price range.
Mortgage Loan Application
You’ve been pre-approved for a loan. You’ve found a home that meets your needs, and you’ve made an offer to buy it. The seller has accepted your offer. Now it’s time for the next stage of the mortgage approval process, and that’s the loan application.
This is a straightforward step in the process, because most lenders use the same standardized form. They use the Uniform Residential Loan Application (URLA), also known as Fannie Mae form 1003. The application asks for information about the property being purchased, the type of loan being used, as well as information about you, the borrower.
Once you have a fully executed Contract to Purchase and a completed loan application, your file will move into the processing stage. This is another important step in the broader mortgage loan approval process.
Loan processors collect a variety of documents relating to you, the borrower, as well as the property being purchased. They will review the file to ensure it contains all of the documents needed for the underwriting process. These documents include bank statements, tax records, employment letters, the purchase agreement, and more.
Mortgage Document List
- Pay stubs (two months)
- W-2 (two years)
- Tax returns (two years)
- Bank statements (two months)
- Investment account statements
- IRA / 401K / pension statements
- Current statements for outstanding debt such as credit card, auto and student loans
If you are refinancing your mortgage:
- Most recent monthly mortgage statement
- Most recent property tax bill
- Homeowner’s insurance declaration
- If property is owned in a trust, a copy of the trust
If you are self-employed:
- Business license
- Schedule C
- Corporate tax returns
- Partnership returns
- Business profit & loss statement (P&L)
- Business bank statements (depending on loan program)
If you own income producing real estate:
- Schedule E
- Schedule of real estate owned
The loan processor will also:
- order credit reports (if this hasn’t been done already),
- begin verifying income, assets and employment, and
- order a home appraisal to determine the value of the property.
The exact steps performed by the loan processor can vary slightly from one company to the next. It also varies based on the type of mortgage loan being used. But this is usually how it works. After this, you’ll move into one of the most critical steps during the mortgage approval process — underwriting.
Underwriting is where the “rubber meets the road,” when it comes to loan approval. It is the underwriter’s job to closely examine all of the loan documentation prepared by the loan processor, to make sure it complies with lending requirements and guidelines.
The underwriter is the key decision-maker during the mortgage approval process. This individual (or team of individuals) has authority to reject the loan if it doesn’t meet certain pre-established criteria. The underwriter will double-check to ensure both the property and the borrower match the eligibility requirements for the specific mortgage product or program being used.
The underwriter’s primary responsibility is to evaluate the level of risk associated with your loan. He or she will review your credit history, your debt-to-income ratio, your assets, and other elements of your financial picture to predict your ability to make your mortgage payments.
Mortgage underwriters focus on the “three C’s” of underwriting — capacity, credit and collateral:
- Capacity — Do you have the financial resources and means to repay your debts, including the mortgage loan? To answer this question, they’ll look at your income history and your total debts.
- Credit — Do you have a good history of repaying your debts, as evidenced by your credit reports and scores?
- Collateral — Does the property serve as sufficient collateral for the loan, based on its current market value? The underwriter will use the home appraisal report to determine this.
If the underwriter encounters issues during this review process, he or she might give the borrower a list of conditions that need to be resolved. This is known as a conditional approval. A common example of a “condition” is when an underwriter asks for a letter of explanation relating to a particular bank deposit or withdrawal.
If the issues discovered are minor in nature, and the borrower(s) can resolve them in a timely manner, then the mortgage loan can move forward and eventually result in approval. However, if the underwriter discovers a serious issue that is outside the eligibility parameters for the loan, it might be rejected outright. Some borrowers sail through the underwriting process with no issues whatsoever. It varies.
Underwriting is arguably the most important step in the mortgage approval process, because it determines whether or not the loan is ultimately approved.
Mortgage Loan Approval and Closing
If the mortgage underwriter is satisfied that the borrower and the property being purchased meet all guidelines and requirements, he will label it “clear to close.” This means all requirements have been met, and the loan can be funded. Technically speaking, this is the final step in the mortgage approval process, though there is one more step before the deal is done — and that’s closing.
Prior to closing, all of the supporting documentation (or “loan docs,” as they are called) are sent to the title company that has been chosen to handle the closing. And there are a lot of documents. The home buyers and sellers must then review and sign all of the pertinent documents, so the funds can be disbursed. This happens at the “closing” or settlement.
In some states, the buyer and seller can close separately by setting up individual appointments with the title or escrow company. In other states, the buyers and sellers sit at the same table to sign documents. The procedure can vary depending on where you live. You can ask your real estate agent or loan officer how it works in your area.
Prior to closing, borrowers should receive a Closing Disclosure. This is a standardized form that gives you finalized details about the mortgage loan. It includes the loan terms, your projected monthly payments, and the amount you will need to pay in fees and other closing costs.