How to Understand the Home Loan Process

Getting a home loan requires going through several steps. Before you make an offer on a house, you must get a pre-approval letter from a lender detailing the loan amount for which you qualify. After your offer on a home has been accepted, you'll finish the application process and close on the home.

Get Pre-approved

The first step in the home loan process is getting pre-approved by a lender for a mortgage. To do this, you'll need to contact a lender -- this could be a bank or a credit union -- and work with one of their loan officers to complete the mortgage application.

The Home Loan Learning Center explains that you'll need to provide the loan officer with information about your income, savings, investments, debts and other obligations. The loan officer probably won't verify your financial information or check your credit score at this time.

Your loan officer reviews your mortgage application and sends it through the lender's credit department for approval. If it's approved, the loan officer will issue you a pre-approval letter. This letter details how much money you're eligible to borrow for a home purchase and the APR the lender is offering.

Tip

Zillow recommends that you ask lenders how they arrived at the APR and if it's the best rate the you can get. You should also explain your timeline to buy a house and make sure that the lender can get the loan approved in time.

Find a Home

Once you're pre-approved for a loan, you can start working with a real estate agent to find a suitable home and make a formal offer. Upon making an offer, you'll be required to sign a sales contract and put down a deposit -- which is usually applied to your closing costs -- with the seller.

When you're ready to buy the home, return to your lender and finish the loan application.

Documents You'll Need

A loan processor, who helps prepare your loan information, will ask you for a few documents to complete your loan application. Freddie Mac notes that you'll need the following documents to complete the loan application:

  • Documents verifying your income. If you're employed, you'll likely need 30 days worth of pay stubs and two years worth of W-2s. If you're self-employed, you'll need to provide two years worth of tax returns.
  • Information that verifies your debts, like car loan and student loan documents.
  • Documents that verify your assets, like recent bank statements.
  • Proof of supplemental income like dividend, interest or other passive income.

The Approval Process

Your loan processor will submit your loan application to a mortgage underwriter. The underwriter reviews the application and considers a variety of factors -- like the home's appraised value, the size of the loan, your creditworthiness, income and debts -- before approving or denying the application.

Important Forms

Your lender will provide you with a Good Faith Estimate within a few days of receiving the application. The Good Faith Estimate is an estimate of what your closing costs and mortgage terms will be if your application is approved.

Once your loan is approved, you'll receive a HUD-1 Settlement Statement that details your actual costs.

Tip

Compare the HUD form with the Good Faith Estimate; the costs should be about the same. If they're not, ask your lender about the difference.

Your lender will also send a Truth-in-Lending Disclosure Statement. This document notes the entire total cost of your mortgage and details the amount you're financing, your APR, any finance charges and your repayment schedule.

Lastly, your lender will send a Commitment Letter to finalize the loan. This details the specific terms of the loan. Sign and return this form within five to 10 days of receiving it.

Close on the Loan

After your application is approved, you'll attend a meeting -- referred to as closing -- in which the home owner transfers the property to you.

You'll sign a document agreeing to the mortgage, and you may also sign a deed of trust. You'll also need to sign declarations and affidavits indicating that you agree to your new financial obligation.

If you don't understand what you're signing, Freddie Mac encourages you to ask your real estate agent -- who will be at the closing -- to explain the paperwork.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.