When you purchase a home, chances are you’ll need to obtain financing (i.e., a loan) in order to have enough money to pay for the property at the closing. The most common type of loan obtained by a buyer for the purchase of residential real estate is a mortgage loan, which means a loan that’s secured — or collateralized — by the property that’s being purchased.
The basic framework of a mortgage loan is this: The lender gives you the money to buy a property, in exchange for your promise to pay back that money over time, plus interest. You also pledge your new home to the lender as collateral (or security) to protect the lender in the event that you fail to meet your loan repayment obligations. If you default on your repayment obligations, the lender can foreclose on (take possession of and sell) your property to recoup its losses. It’s during the Mortgage phase of the closing process that you undergo a rigorous loan approval process with a lender of your choice to obtain a mortgage loan for your purchase of the property.
The basic parts of the mortgage approval process are:
Our explanation of the Mortgage phase of the closing process focuses on the basic steps of the mortgage application and approval process and how to make it a smooth and efficient experience. For guidance on specific mortgage products and types, and their suitability for your particular needs, consult with a mortgage professional.
Resources:
Are Mortgage Lenders Charging Uninformed Homebuyers More?
Adjustable Rate Mortgages (ARMs)
Homeowners: How to Pay Off Your Mortgage Faster
2024 Conventional Loan Limits Explained
Don't Be a Victim: Ensure Your Mortgage Rate Is Locked
Warning Signs of a Problematic Mortgage Lender: High Fees, Poor Service, and More
What Not to tell your Lender when applying for a Mortgage Loan
Can I WORK With 2 LENDERS At The SAME TIME?
How to Find The Best Mortgage Rates | Advice From Top 1% USA Mortgage Lender Rate Shopping Nightmare
Understanding Mortgage Insurance
From a Sample Contract below
NJ Real Estate Sales Contract (2023).pdf
Most buyers don’t have the financial means or liquidity to make an all-cash purchase of a home. If you need financing to complete the purchase of your new home, your Contract will contain a mortgage contingency, which is a provision that makes your obligation to complete the purchase of the Property contingent upon your ability to obtain a mortgage commitment from a lender within a specified amount of time, usually 30 days from the conclusion of Attorney Review. A mortgage commitment is a lender’s written promise to loan you money, as long as you can satisfy certain final conditions listed in the commitment itself. If you can’t get a mortgage commitment within the allotted time, then the mortgage contingency in your Contract gives you (and oftentimes the Seller, too) the right to terminate the Contract.
Once Attorney Review has concluded and you have a binding Contract with the Seller, it’s time to dive into your mortgage application.
The Mortgage phase is the longest phase of the closing process. Unlike the other six phases, the Mortgage phase doesn’t end before the next phase begins. Instead, the Mortgage phase begins as soon as Attorney Review is concluded and doesn’t really end until the closing itself, when you sign the loan documents and close the loan, triggering the release of the loan funds to be used to complete your purchase of the property.
You should aim to pick a lender as soon as possible after Attorney Review concludes, ideally within the first five (5) days. Getting off to a swift start with the mortgage approval process is crucial because of the time limit set in your Contract for you to obtain a mortgage commitment: most commonly 30 days from the conclusion of Attorney Review.
That said, perhaps the #1 mistake that buyers make when it comes to their mortgage is not shopping around for a lender. According to a 2015 government survey, a whopping 47% of borrowers didn’t compare lenders. When you consider that buying a home is one of the largest, most important financial investments you’ll make in your lifetime, and that you’ve probably spent more time than you’re willing to admit researching TVs or mobile phones — this statistic is mind blowing.
QUICK TIP!: Tell every single lender, even if you're not shopping them, be like, 'Yeah, you know, I've been comparing rates for six months now.” - You’ll likely get a better rate if you do this. See article.
The differences in overall life-of-loan cost savings between different loan products can be staggering, and you’ll miss out on these potential savings if you don’t shop around. The government’s report on the 2015 survey explains it like this: Consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates. For example, our research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent. Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month. Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.
To ensure that you’re not unwittingly leaving major money on the table, be sure to get quotes from at least three or four different lenders. Consider not only the big commercial banks, but also smaller institutions like community banks, mortgage companies, and even credit unions. You should aim to speak with a handful of lenders of varying types and whittle down your choices to the final few contenders by the time Attorney Review concludes and the Mortgage phase begins.
QUICK TIP!
Lender referrals from your real estate agent can be a good starting point for your lender shopping, as oftentimes your agent’s brokerage will have a “preferred vendor” relationship with one or two mortgage companies that have a proven track record of successful transactions and strong customer service with the brokerage’s clients. You may have even already obtained a pre-approval letter from one of those preferred lenders when you submitted your offer, as they’re often the quickest path to obtaining a pre-approval letter during the time-sensitive Offer Negotiation phase.
The lending professionals you’ll encounter while doing your research will generally fall into one of two categories: (i) mortgage bankers, or (ii) mortgage brokers.
Generally speaking, mortgage bankers work directly for the lending institution that’s loaning you the money; also known as loan officers, they’re in the business of “selling” their employer’s mortgage loan products to homebuyers like you. The lending institution that employs them is known as a “direct lender.”
Mortgage brokers, on the other hand, don’t work for a specific lending institution but, rather, have relationships with multiple lending institutions and are able to shop your loan around to those lenders to find the best match; they then function as an intermediary or middleman between you and the ultimate lending institution that issues your loan.