How Mortgage Loans Are Processed


Mortgage loan processing is another crucial aspect of securing loan for buying a house. Not all customers may qualify for a loan approval. Loan processing has certain pre defined steps and regulations in order to assess the credibility of the candidate. In U.S., origination is the process by which mortgage is secured by the borrower against any risk. The borrower needs to choose the bank/financial institutions as per the requirement, as there are enumerable financers floating in the market for mortgage loans. However at times this is also took care by the mortgage broker, as they are well aware of the market. In this case the mortgage broker holds the documentation of the borrower and receives several applications from the subsequent lender. He then selects the best suitable option for the borrower keeping in mind the basic requirements.

Once the lender has been selected the next step is to apply for the loan. Borrower applies for loan by submitting the application and documentation as per his/her financial history. These documents are received by lender and send to the underwriting department to check the suitability. Mortgage loans often involve huge amount and extended time tenure hence it is utmost important for lenders to be fully satisfied with the credentials of borrower. Often the documentation is a cumbersome process for borrower however there are many banks which also offer "low-doc" or "no-doc" loans as well, which requires bare minimum paper work. Primarily these are secured for high end users with spotless credit history and on higher interest rates.

Loans are also resold in the open market to big investors. Once the loan is granted to borrower, the originating mortgage company sells them to other investors, bearing partial risk for issuing them. This gives them additional fund to float in the market in forms of mortgage loans. The loans offered by these big players are often on high interest rate hence borrowers do not wish to originate them.

Once the application reaches to underwriters, there could be two possibilities, either it is accepted or rejected. In first case, the application is then send for further verification which could be either telephonic or in person. Once all terms are satisfied the borrower is send a letter of approval stating that loan of such amount is approved and being granted to him/her. In second case however the customer is asked to provide additional documentation to top up his/her credibility. Though daunting for customer but this exercise is essential for lender to secure the huge amount being granted to borrower.

Main documents required to secure a loan are credit-report, Loan application, VOE, VOD, copy of deed of current home, transmittal summary etc. Now days, manual underwriting has been replaced by automated underwriting. The statistical model helps in reducing the amount of documentation considerably. Most common of these automated engines are Freddie Mac's 'Loan Prospector' and Fannie Mae's 'Desktop Underwriter'.

Last but most important step of loan processing is "dispersal". Once the letter of approval is send to the customer, the customer becomes eligible for the applied loan amount. The amount is issued in the name of the person/body with whom the customer is buying the house, and in turn the property papers are held in the name of the banking institution. Once the loan amount is fully paid, papers are then transferred to the customer.