BEHIND THE CURTAIN: WHAT YOU NEED TO KNOW ABOUT THE LENDER’S PROCESS
This blog attempts to summarize the lender’s process from contract to closing. Nothing in this blog should be used in place of actual legal advice. Please contact a lender if you need advice on a home loan.
Geoffrey: Today’s blog is all about the lender’s process and how everything works behind the scenes on that side. It’s very important for all industry players – Realtors, attorneys, and mortgage lenders – to know what we do and how we work together in the industry so that we can better advise our clients and give them accurate expectations regarding the closing process. To help us learn a little more about the lending side today is our guest speaker Ginny Terry, Senior Mortgage Banker with Renasant Mortgage Lending. Without further adieu, I’ll hand it off to Ginny.
Ginny: I always like to start with this flyer and I always tell my Realtors to pass it along to their clients because it gives everyone an idea of what to expect.
In my world, it all starts out with a prequalification letter. This allows us to find out what their income is, how long they’ve been employed, how long they’ve been living in their current home, etc., and it also gives us permission to pull credit. The application and the credit pull is the start of the process, and then once we have the income and the debts we can find the Debt to Income Ratio, which allows us to figure out what level of home they’re able to qualify for. I also provide an application, and the questions on that will help me determine which kind of loan product is going to best meet their needs – conventional, FHA, VA, USDA, and, in our case, portfolio products. As a loan officer, it’s my job to determine based on their capacity (the amount of money they have to work with) which of these loan products will fit them best. The application also shows you as their Realtor that they’re serious about purchasing a home and that they’re qualified to purchase the home that you’re taking time to go show them.
Once the client goes under contract, my job changes. Then I’m going to reach out to the closing office to request their fees, and I’m going to disclose to the consumer what rate they’ve locked in at and what fees go along with it including closing costs and prepaid items — this could include 15 months of homeowner’s insurance, 2 months of property taxes, and the number of days of prepaid interest between the date of closing and the date of the first payment. At this point we also order the title and the appraisal, and I reach out to the insurance company to request proof of insurance for the correct closing date. After the application, I’m going to send our checklist to the customer, which is a list of items that are needed in order to give final loan approval.
We will always ask for a copy of their driver’s license, paystubs (unless they’re self-employed, in which case we need two years of federal tax returns and a year-to-date Profit & Loss Statement), etc. Once they have submitted all these documents to us, they’re then ready to submit their loan to underwriting for final approval. Now, I can get credit approval before we have the appraisal back – in our market in the last year we’ve seen appraisal turn times go from getting it back in a week to being lucky if you get it back in two weeks or sometimes even three weeks, sadly.
As I’m collecting all these checklist items from the client, the title work is coming in, the proof of insurance is coming in, and hopefully just as these come in we’ll also receive the appraisal.
Geoffrey: Just to add on regarding the parallel views here of what’s going on for everyone at the same time, you can see here a side-by-side view of what’s happening at any given point for the lender and for the closing attorney.
When you’re in the contract phase and your client is trying to get preapproval from the lender, typically I’m not even in the game yet unless I’ve had to do some early title work on the property or an agent has requested advice from me on how to write a certain provision in the contract. Once the contract comes to me, that’s when there’s a lot of crossover. Ginny mentioned earlier that there’s a point where the attorney gets title to the lender, and that’s one of the most important parts to get everything moving and maintain a clean timeline. The only way I can get title out to your lender is if the lender knows I exist and can send me a Request for Title. This is why it’s very important for the agent to connect everyone involved in the process early on – then we’re able to communicate with each other to make sure both sides get what they need in a timely fashion.
Once I get the contract in, I order title immediately. Title can take up to two weeks to come back to us depending on which county the property is located in, and once we get it back we’re able to issue the title commitment to the lender. Once we’ve communicated about title, we get right back into the period Ginny was talking about where she’s collecting client info, inspections and appraisals are being done, we’re getting the binder sent out, etc.
Ginny: I appreciate you taking the time to explain it because there’s a lot that’s done behind the scenes that people don’t see, but all these things need to get done to allow us to get to the table successfully. In the background you have the follow-up on the title work, the follow-up on the insurance, being sure I have all the documents from the customer, being sure the appraisal was ordered, etc. When it comes to the appraisal, I typically try to schedule it to happen after the inspection is done; we sure don’t want to be spending $600 of your client’s money only to find out there was a dealbreaker in the inspection report and the deal won’t go through. So we do order the appraisal right away, but we try to schedule the appraiser to actually go out right after the inspection is done so that we know everything is still moving forward and we’re all still heading to the closing table.
As we wait for the appraisal to come in, I’m still collecting documents from the client, the processor is verifying employment, and then once that verification comes in the processor is ready to submit the file for approval whether we have the appraisal back or not. Thankfully in the last year or so property values have not been the issue when it comes to an appraisal, but there have been many times with escalation clauses where customers have had to bring a lot more cash to the table to cover the difference.
Geoffrey: You have a note on here that it has to go through underwriting for final approval, and I wanted to mention to the agents that there are underwriters on both sides; I have my underwriters for title insurance, and Ginny has her underwriters for the lender’s side, and these people are making sure we’re following the rules we’re supposed to follow as we do our jobs. These underwriters are not the same person for both sides, and I mention this because it takes different timelines to process these things once you get to this stage. When your lender says “I really need to get this to my underwriter for review,” it’s very important to the process because lender docs need to be submitted to underwriting at least 3 days before your closing date in order to get a clear to close. So the client can’t think about it as if they have until the closing date to get the lender what she needs because everything has to be turned in at least 3 days before. This means they likely don’t have an extra week to do this; they probably only have 2 days. Getting all the documents to the lender is a very important part of the process in order to maintain timelines and close on time. My side of underwriting isn’t as time-consuming as your lender’s is; if we have title fixes that need to be done then I may come into play more, but for 90% of our closings we’re really just focused on getting approval through the lender’s side.
Ginny: That’s true, and you brought up a really good point about timelines. Once the file is sitting in front of the underwriter and she gives approval with conditions, then the next timeline starts for issuing the Initial Closing Disclosure, which has to be sent to the customer 3 business days prior to closing. This is a law and isn’t negotiable. If the file is closing on the 31st, that Initial Closing Disclosure has to be sent to the customer and signed at least 3 business days prior in order to make that 31st closing date. So our underwriting process needs to happen even earlier than this in order to still stick to the correct timeline for closing.
It’s so important to keep these timelines so that we can at least get approved with conditions in enough time to get the Initial Closing Disclosures out 3 days prior to closing, and then even though the customer signs it, they’re just signing that they’ve received it on that date – those numbers can change many times right up to closing, though usually not by much. Between the times of the Initial Closing Disclosure and the final CD being done, the lender and the attorney are tweaking the numbers to be sure we get down to the last penny of the final number the customer is required to bring to closing.
Geoffrey: I know you mentioned some of the different loan types earlier (conventional insured, conventional uninsured, USDA, FHA, VA, etc.). Regarding these loan types, does your timeline change depending on which loan your client is using?
Ginny: For the most part the answer is no, with one exception: on a USDA loan, not only do we have to get the loan approved, but once we approve it the entire file, including appraisal, has to go to the USDA for them to approve. In the last year I’ve seen the process on the USDA side improve tremendously; in previous years we’ve had files sit in the USDA queue for 30 days, and that’s the part we have no control over because nothing can make the US government move faster on a file.
Geoffrey: Absolutely. We always cringe a little when USDAs come up because we wonder what the luck of draw will be on the government timeline, but we do close them and they’re great when they do come through, so it’s just a matter of working through those timelines.
Ginny: Exactly. If you explain the timeline from the start then there shouldn’t be any surprises to anyone involved in the file.
Geoffrey: That’s a recurring theme we have: expectations. We always want to set up accurate timelines for the client because what upsets them the most is being blindsided or being hit with something they didn’t expect. Any early heads up on things such as the fact that the closing date may be pushed a little depending on when the loan gets government approval will help – it’s better to give early warning of not-so-great news than for the client to be blindsided by it very close to closing.
I’ve seen some agents get confused at closing when I say “Now I have to submit these documents to the lender for final approval.” In their minds the loan has already been approved, so they don’t understand what we’re getting approval for. Can you talk about the day of funding approval?
Ginny: Sure. Sometimes, for example, a customer is using gift funds and will be bringing a cashier’s check to closing – the lender has to make sure the check has been written properly, that it’s for the right amount, etc. Sometimes there’s something an appraiser noted on an inspection, especially on a government loan, regarding something that needed to be repaired, and the lender is going to ask the attorney to verify that the repair has been completed to the standard we’ve asked for via the final inspection report. The attorney will sign off on it and say that he was provided with the document we asked for.
Geoffrey: Absolutely. And sometimes the lender will actually ask to see the documents for proof, so we will have to scan them in. It can be one document or half a loan package – it just depends on each lender’s requirements for funding approval. So the customer is already approved for their loan and the attorney likely already has the money held in their own escrow account, but the lender says “You can’t use that yet until we verify these final things, and then you can release the money.” So when I talk about funding approval at the table, what I’m really saying is that I need the lender to give me approval to give you the money they’ve given me.
How many days have you seen the turnover decrease to regarding USDA loans?
Ginny: I just closed one last month and underwriting took less than a week. I can’t promise it’s always that way, but it’s been much better lately.
Geoffrey: And Ginny, correct me if I’m wrong, but the USDA changes throughout the year. Earlier in the year they may have more funding available to give out to borrowers, but then later in the year they get tighter restrictions on funds and aren’t able to close as easily.
Ginny: I’m glad to say that so far I’ve never seen a USDA loan run out of funds, but it’s always good to ask on the front end whether the USDA is actually funded because sometimes they’re out of funds. And when we have a government shutdown, USDA, VA, and FHA loans are not closing because they’re government-sponsored.
I’ve seen clients get their Closing Disclosure fewer than 3 days ahead of closing and sometimes they don’t even see it until we’re at the closing table. How does this happen and how are they still able to close when they didn’t get that 3-day window?
Ginny: For us as a lender, if it hasn’t been signed 3 days prior to closing then we can’t close. I’ve had times where it’s been sent out prior and I’ve met with customers so they can wet sign it with the right date on it, but if it’s e-signed and the date is automatically applied to it then we as lenders have no choice but to wait at least 3 more business days to close.
Geoffrey: What I’ve seen happen, which confuses the agents, is that a lender will email a client and ask them to sign their Initial Closing Disclosure so that they can get approval and close on time, and the client will sign it without really looking it over and then a few days later will tell their agent they haven’t seen final numbers yet. The 3-day window is a very strict compliance rule with the federal government and the CFPB (Consumer Financial Protection Bureau), so you can’t get around it. It’s more likely that the client didn’t realize what was happening if the numbers weren’t verbally explained to them at the time. The reason the lender and the attorney don’t necessarily push the client toward the CD they get 3 days beforehand is that it’s still prelim at that point and usually doesn’t include final numbers. It’ll be really close to final or estimated a little higher than expected because we’re setting expectations, but likely isn’t 100% accurate yet. We do our best to get those documents out as soon as possible, but sometimes the documents we need to get those numbers from aren’t coming to us in a timely manner, so there can be last minute changes. Always feel free to reach out to the lender or the attorney if you or your client has questions about those numbers.
What happens when you get really close to closing and then one side pulls out?
Geoffrey: It does happen, and this is what the earnest money is there for. Alabama is generally very nice about earnest money; other states require earnest money as well as good faith money that’s non-refundable, so if you’re paying $3,000 in earnest you’re also paying around $5,000 in good faith as well. This happens because their markets are very aggressive and they only want good faith buyers and good faith sellers; there’s a lot more money on the front end to avoid that waffling taking place where a buyer signs a contract but isn’t sure they’ll go through with it. Generally it’s too expensive to litigate a real estate contract for the purchase of property; what you’re asking for there is a specific performance from the client who is not delivering the product. Damages in a case like this are almost impossible to figure out, so what you end up fighting over is just the earnest money. If you ever have buyers who don’t seem 100% committed, you can always ask for higher earnest money in the contract and make it non-refundable – putting more money down right away will likely make it less likely they’ll pull out at the end. If the contract does fall through, always get a mutual release. You can’t just move on to the next one and sign a new contract or relist immediately because the contract will be recorded in probate and it will prevent your buyer from being able to get a loan on a different property and will prevent your seller from selling the property until the signed contract is cleared from probate with a mutual release. If you ever have questions about this, always talk to your attorney right away.
When a buyer is asking a seller to cover their closing costs, how much should the buyer ask for while the offer is being prepared?
Ginny: This hasn’t been as common in the last year, but it used to be very common in our local real estate transactions. Typically in our market, if you’re looking at a home that’s roughly $500,000 or less, a good rule of thumb is to ask for about 2.5% of the sales price. That should cover your closing costs (all the fees required from start to finish to get the loan closed) and prepaid items (15 months of homeowner’s insurance, 2 months of property taxes, and prepaid interest from closing date to the date of the first mortgage payment). For a conventional loan with 5% down, the seller can only contribute a maximum of 3% toward closing costs; if they’re putting down more than 5% then the seller can contribute as much as 6%, but I believe the buyer has to put down 10% or more to get that higher seller contribution. On a VA loan the seller can pay up to 4% and on an FHA the seller can pay up to 6%. USDA though is limited to 3%. As you get into higher priced homes, your closing cost percentage is smaller because that smaller percentage equals a higher dollar amount. But yes, there are certain percentages that each loan type can’t exceed.
Have you ever seen a contract where the agent puts a percentage in the seller contribution rather than a dollar amount?
Geoffrey: I’ve never seen that. Ginny, have you?
Ginny: I can’t say, in all my years in this business, that I have seen that. I’ve always seen a dollar figure, personally.
Geoffrey: I think you’re better off, if you do want a percentage, calculating the percentage based on purchase price and then just adding that dollar amount to the contract.
When do you order tax transcripts and how long is that currently running?
Ginny: We typically order tax transcripts as soon as the file is turned in to processing. They’re still taking 1-2 weeks, though it’s been closer to one lately. The IRS is pretty good about notifying lenders if their turn times are longer, so we order as early as we can to avoid surprises.
What’s the best way to appeal an appraisal?
Ginny: If an appraisal comes in low, my first step is to reach out to the listing agent and ask how they came up with the sales price. I ask to see the comps the Realtor used to calculate sales price in today’s market, and then I’ll show those to the appraiser because there are times when the appraiser doesn’t use the same comps that the Realtor originally used. And sometimes they’ve used pending sales as comps and that’s fine, but the more information we have, the easier it is to challenge it.
Geoffrey: So the best way for an agent to appeal an appraisal would be to initially contact the lender and then go from there. If you’re going to challenge an appraisal, come prepared with those comps.
When I first started, all you heard of was the HUD; now it’s Settlement Statements and Closing Disclosures. It seems to be done differently from one office to another. What are the official names and who sends what?
Geoffrey: There have been a lot of changes to the forms we use and what they’re called since 2015.
Ginny: Up until 2015 we all used the HUD Settlement Statement, which to me was very clean and easy to read and everyone generally understood it. Today, we now have the Loan Estimate right up front, which is as close as we can get that early in the process to telling you what we think you’ll be bringing to closing. Then, just prior to closing, the Initial Closing Disclosure goes out, and then there’s the Final Closing Disclosure once we have the numbers to the penny and we know exactly what they’ll be. But there’s also the ALTA Statement, which shows what the seller will be receiving in a much more broken down presentation than the CD does.
Geoffrey: I’d agree with that. The CD was created by the CFPB, if I remember correctly, and it was their answer to the public’s complaint that the HUD was hard to read and understand. The CD was supposed to be a consumer-friendly answer to let clients better understand the closing process and the fees associated with it. If you do cash closings today, you’ll still get a HUD Statement, but any time you have a lender involved it has to be a CD because of the new rules. What can be confusing is that the CDs have different names during different parts of the closing – you have your prelim CDs, your final CDs, your buyer’s CD and seller’s CD, a combined CD, etc. They’re all the same basic template though. Once you get to my office, in addition to the Closing Disclosures we’ll have the Settlement Statements themselves. Settlement Statements are put out by a different department all together called ALTA. These are your very bare bones itemizations to show the buyer on one side and the seller on the other and who paid each fee. That’s the form I prefer when going over numbers with clients because it’s very streamlined – it’s only 1-2 pages and itemizes everything down to the bottom line to show what each party is getting or paying and you can see everything all at once. The CD does the same thing, but it’s got a lot more detail – it shows what the final number is as well as what they originally thought it was going to be, the percentage difference between those numbers, and the legalese that explains it. While the CDs are great, I still prefer the simplicity of the Settlement Statement.
Can you go into more detail about the escalation clauses you’ve been seeing?
Geoffrey: I think the main problem we’re seeing with these isn’t the clauses themselves, but more the escalation above appraisal price. The Realtor has to set the expectation there that if it does escalate to higher than the appraisal price, the client is still under contract for that amount and they just have to bring the difference between the two numbers in cash to the closing table. The lender will only lend up to the appraisal point, so for example you can’t get a loan for $500,000 if the house only appraised for $475,000; then you’d get the $475,000 loan and have to bring an additional $25,000 to closing to cover the difference. Typically the lender will give you a loan that’s a little bit below the appraisal point because they want you to have equity in the property and to have skin in the game.
Ginny: That’s exactly right and in this market there have been a few instances where the purchaser is bringing additional cash to closing.
Geoffrey: The big discrepancy I see on people’s faces when this happens is that they say “Oh, I didn’t realize I had to bring that to closing. I thought it was going to be part of my loan!” That’s why we need to set these expectations early on so the client isn’t on the hook for cash without knowing they will need to bring that much.
By: Geoffrey K. Middleton & Ginny Terry
Written in Feb 2022