Real talk: buying a house can be intimidating. So we created the first-time homebuyer series to take the mystery and anxiety out of the house-hunting process. Dive into our complete guide which covers every step of the process: why you should buy a house, how to get pre-approved for a loan, how to find an agent, how to search for a home, how to make an offer (and negotiate!), how an inspection works and how to close once you find the dream home. Don’t worry we spell it all out for you so that if this is your first time (or third) you’ll have all of the information you need for a successful purchase right at your fingertips. Read the entire series here.
At this point in the home buying process, you should be preparing to close. This includes completing an appraisal, doing a title search, buying homeowners’ insurance and waiting for the seller to complete any agreed-upon repairs after the home inspection. The frustrating part about this step is you won’t actually be doing any of this! All of these tasks are handled by the lender, your agent, your closing team and the seller.
While these are being completed, your lender is working to finalize your home loan for approval. Remember when we took a deep dive into the world of mortgages and reviewed home loan types? At this point, you already know what kind of home loan you’ll have and your lender already has your loan application. The home loan approval process involves underwriting and your lender will need the appraisal and title search complete to finalize your loan.
This look at the home loan approval process will cover:
- What home loan approval is
- The home loan underwriting process
- What happens if a buyer is denied for a loan
- What questions to ask your loan officer
If you’d like to jump to a certain section of the guide, just click the links above.
Let’s get into it!
Meet the Expert
Brian Swanson is the branch manager of the Des Moines, Iowa office of Inlanta Mortgage. He’s worked in the mortgage and financial services industries for more than 20 years and offered a wealth of insight and expertise into all of the questions and issues laid out in this guide.
What is a Home Loan Approval?
Remember, this is happening behind the scenes with your lender while your agent and closing team are handling the other paperwork that needs to be completed before you can officially close.
You already sat down with your lender at the beginning of the home buying process and discussed your home loan options and personal financial goals and completed a home loan pre-approval which allowed you to shop around for your home. Now that you’ve found the home that fits your needs, it’s time to finalize the home loan you’ll take out to purchase it.
When you first met with your lender, you provided financial information such as proof of income, credit score, debt information and W-2s, to name just a few. Your lender used these to pre-approve you for a specific home loan, but the loan is not official until the approval process is complete.
I thought I already did my loan application? There are a lot of factors that go into buying a house. Remember how we said it could take months to find the right house and a lot can change in that time. What if your income changes during that time? What if you take on more debt? What if mortgage interest rates change? Your initial pre-approval allowed your lender to determine that you most likely would be able to take on a certain loan. Now it’s time to make it happen!
The Home Loan Underwriting Process
“The loan process is working simultaneously with the inspections, appraisal and title searches,” said Brian Swanson. “As those items are being taken care of, we are ordering verifications of employment, income and asset verifications and double-checking all of the items that need to be documented for the loan file final approval.”
You submitted some of the documents already in order to obtain pre-approval. If nothing has changed since you first sat down with your lender then started house hunting, your lender will use those same documents to again verify your income, employment and other financial information. However, if you changed jobs, got a promotion, lost your job or your income or employment somehow changed, your lender will need updated information as quickly as possible in order to approve you for the loan.
“The buyer only needs to provide any information we request in a timely manner,” explained Swanson. “We can only work as quickly as the information is provided so sometimes a delay is caused through the process because a buyer is not providing information either upfront or when requested.”
Once your lender has all the information they need, they’ll order an appraisal, a credit report and a title search.
We discussed what an appraisal is in our ‘How to Prepare for Closing’ article. The appraisal determines the market value of your home to make sure the home loan amount you’re asking for matches what the home is truly worth. The lender wants to make sure they’re not loaning you too much and you as the buyer want to make sure the purchase price is at or below the fair market value.
The lender works with a third-party, the appraiser, to determine this. An appraiser will schedule a time to come out to the home to do an inspection of the interior and exterior. They will also research home values in the neighborhood and use public records to learn everything they can about the home. All of this information goes into a detailed report.
“Once the appraisal comes in, the buyer will receive a copy for their review,” said Swanson. “I will hit the highlights of the appraisal with them- such as the market value versus the purchase price, the comparable properties used in the neighborhood and if any additional work is necessary to be done to the property prior to closing in order to meet agency guidelines.”
Remember, when we first reviewed home loans, we talked about how lenders offer loans that are backed by organizations like Freddie Mac and Fannie Mae and therefore loans must meet these agencies’ guidelines or else they may not purchase them from the lenders.
If the home inspection found some significant issues that needed to be addressed- say a serious plumbing problem or a damaged roof- the lender may require these fixes to be completed before the loan can be approved. They want to make sure you’re a safe risk and the house is worth the loan they’re giving you. Certain loan types, such as FHA, USDA and VA loans, may sometimes have stricter guidelines for the status of a home and may require more repairs before the agency will back the loan.
These fixes would be negotiated already between your agent and the seller and the lender will be notified when they’re resolved. If an appraiser finds a repair issue, many times they’re the ones who have to go back out to the home to verify it’s been done and report that to the lender.
Your lender likely did a “soft pull” on your credit to determine your pre-approval. A soft pull only checks your credit with one credit bureau and won’t show as a credit inquiry on your record. Now that it’s time to complete the loan application, your lender will pull a complete credit check from all three bureaus.
If you already obtained a copy of your credit report before starting the house hunt, and nothing significant has changed about your finances, then you shouldn’t be surprised by anything the credit check finds.
The credit report will include your employment information, credit score, finances (other loans, credit card debt, etc.), public record information and a list of credit inquiries. The lender will pass this report on to the underwriter to verify all the information in it and to dig deeper if any issues are found.
We’ve also talked about what a title search is and why your lender needs to complete one. A title search verifies that there are no liens or outstanding claims to the home by a creditor, unpaid vendor or from a government agency. The lender will not approve a home loan if the title search reveals a lien on the property.
If one is found, it’s up to the seller to clear the lien in a timely manner in order for the purchase of the home to go through. Otherwise, your agent likely already added a clear title contingency to your purchase agreement to allow you to walk away if a title issue is found or cannot be resolved.
Once the appraisal, credit report and title search are complete and the lender receives all the information they need, your loan application will be passed on to an underwriter.
“An underwriter is someone who verifies all information from third-party sources to ensure all agency guidelines are met or exceeded,” explained Swanson. “They are the final hurdle to jump prior to funding and closing.”
The underwriter will dig deep into all the information your lender has provided them about you and the home- credit report, employment and income verification, debt-to-income ratio, loan package, appraisal and title search- to determine if the lender should finally approve your home loan.
How long does it take to find out if your home loan is approved?
“Each company varies at which stage they submit the file to an underwriter and each lender is different in how much time it takes to get through that stage,” said Swanson. “I have seen it take a couple of hours and I have seen it take 30 days. Some of this can depend on the volume of loan applications coming in based on market conditions. The more applications coming in, the longer it is going to take.”
Once the underwriter completes their research and verification they will recommend one of three actions: suspend the loan, approve the loan or do not approve the loan.
What if my loan is suspended?
If your lender tells you that your loan is suspended, don’t freak out! It doesn’t mean you’re not approved.
“If a loan is in suspense, it is generally because there is information in the file that counters itself and needs further explanation,” explained Swanson. “This could be as simple as an old address on a bank statement that is not listed on the application as a place you live or it could be clarification is needed on dates of employment or lack of employment.”
How can you prevent your loan from being suspended? Make sure all information you provide your lender is accurate and up-to-date and take the initiative to explain any inconsistencies they may find, such as a change in address or employment.
What if my loan is approved?
If your loan was approved, then congratulations! Your financing is (almost) secured and you’re even closer to closing. However, we just mentioned above that some loan types, such as FHA loans, require a few extra steps before the loan can be approved.
“A loan is generally approved on a conditional basis,” said Swanson. “Many times the underwriter will issue a conditional approval subject to verification of something.”
If your loan approval is conditional, that just means you need to complete an extra step. In some cases, this may mean completing repairs on the new home to satisfy agency guidelines. If you were selling your current home and needed the proceeds to use to purchase the new home, the lender would issue a conditional approval until your old house was sold.
What if my loan is denied?
The underwriter may review your application and decide that you somehow don’t meet agency guidelines or wouldn’t be a good risk. “If a loan denial is issued, the loan officer should be having a conversation with the buyer about what caused the denial and how to remedy the situation,” stated Swanson.
Most of the time the factor that keeps potential buyers from being approved is a credit problem. “This could be caused by something out of their control or by something they did, not realizing it would create an issue for them in the future,” said Swanson. Some of these reasons could include a history of late payments, too many open lines of credit, a small downpayment or an unresolved problem on your credit report.
What should I do if my loan is denied?
Your loan officer is your best source of information. They can walk you through the underwriter’s recommendation and review the problems found.
“[The loan officer] should educate the buyer on how they are able to proceed and explain that, in the future, this can be a reality if they follow some simple steps,” explained Swanson. “Sometimes, it just takes time. They probably didn’t end up with unapprovable credit in the last 30 days, so it generally won’t be fixed in 30 days either.”
Your loan officer can give you recommendations for fixing the problem and can even point you toward financial education resources. Depending on the problems that need to be remedied, you could be approved for a loan later on once your credit is repaired. And if your lender isn’t helpful? “If your loan officer is not calling you back or giving you any direction, you need to find another loan officer,” said Swanson.
What questions should you ask your loan officer?
Your loan officer is your best guide to the home loan process. A good one will take the time to explain everything that’s happening during the application and underwriting processes and will be open to questions as you have them.
Swanson recommends asking your loan officer what the expected timeframe would be for processing your application. Even if there is a high volume of applications, your loan officer could still give you an estimate. A good loan officer will also talk to you about any potential discrepancies they find in your credit report before they pass it on to the underwriter.
They can also estimate closing costs for you as well at this point so you can plan to have that cash on hand. We’ll cover the closing process and closing costs in the last article in the first-time homebuyer series.