Mortgage Loan Application, Approval Process And The Bottlenecks

What is a loan application and approval process and why is it that some lenders make it easy, some make it difficult. Some make it fast and quick and others take forever. What are the bottlenecks and where are they?

Typically a mortgage loan application is for tens of thousands or hundreds of thousands of dollars and often times many millions of dollars, depending on the type and the location of property. So to a lender, this is about risk assessment.  The two main set of information a lender reviews to arrive at a decision in a mortgage application are the borrower and the property. The information reviewed pertaining to the borrower, to name a few, are income, employment history, credit history, assets, etc. When reviewing the property, the value and title of the property are the focus of the lender. So this makes it a complicated legal transaction between the borrower and the lender. 

And since we live in such complex societies and there is no direct contact between the borrower and the holder of the money, and the information needed is provided by many different parties, this gets even more complicated. When this transaction involves the sale of a property, it gets even worse with the addition of the sellers to the transaction. 

I shared all that with you to paint a clear picture of how involved a mortgage loan transaction may be. Now let’s go through the process step by step. The process is summarized in 5 basic steps of gathering information, presenting information, reviewing information & decision making and finally, following through with the decision. Here are the break downs below and it starts with

• A licensed loan officer collecting/Reviewing the information, mainly employment, income, assets and liabilities on a loan application. In the old days, the information was collected in person at the borrowers’ kitchen table or their offices. Nowadays, at best it’s done over the phone or through a website.
• Next step is the verification of the information collected through valid, acceptable documents, such as tax returns and bank statements and sometimes through 3^rd parties such as employers, banks, credit reporting agencies. This step is handled by the loan officer and a loan processor, someone who is in charge of verifying information and preparing a loan package for review.
• Through this process, a credit report is ordered on borrowers to check their credit history, their monthly obligations and credit balances and ultimately obtain a credit score on them.
• Once this information is completed, for most loan programs, the information is entered into an automated underwriting engine and an approval, conditional approval or denial is issued.
• Simultaneously, there is a step to collect information on the property through title companies and appraisers.
• An escrow company is also involved to assist collect the data from title company, sellers (if involved) and play an intermediary role between all parties involved.
• A loan processor packages all the necessary reports and documents such as title report, credit report, appraisal report, escrow instructions, all income and asset information and reviews them for accuracy before submitting them to an underwriter for underwriting.
• The underwriter is an employee of or a contractor with the lender who is authorized to approve a loan application and issue credit to a borrower.
• Once the loan is underwritten, a decision is made and issued. A, it could be a plain denial, as either the property, the borrower, the transaction or something related them does not fit their guidelines and it’s something not curable. B, it may be a clean approval with minimum follow up / supporting paperwork or none at all, or C, a conditional approval, which requires additional information and supporting documents to be reviewed before issuing a decision. The new set of documents are referred to Loan Conditions, which the parties managing the transaction, such as escrow, title, loan processor, loan officer need to collect and provide them to the underwriter before the transaction may proceed to the next step.
• After the full approval is obtained, the next step is drawing a series of documents and preparing them for borrowers’ signature. These documents are referred to as Loan Documents. Before the loan documents are drawn, there is a mini step and that is getting the CD’s out for borrower’s signatures. CD stands for Closing Disclosures. This step was added after the crash of 2008. It’s supposed to add reassurance of the borrowers’ full knowledge of the rate and fees. It may add some value, but in my opinion, it slows down the process. It does more damage than good. I could be wrong though.
• Once the CD’s are signed and the minimum time space has been met, then the Loan Docs go out for signature. The Loan Docs may be broken into 3 different categories, a legal contract which is a promissory note, a set of disclosures, which are required by  federal and state governments for compliance reasons and finally, instruments, documents to be notarized and recorded with the county recorder’s office, available and open to public.
• A typical steps to get the Loan Docs signed are either having the borrower’s go the escrow office and sign them in front of the escrow officer or an assistant who is a licensed notary or send an experienced document signing service to the borrower’s office or home to obtain their signatures.
• Once the Loan Docs are back and reviewed for accuracy and proper signature and initials in the right places, the loan moves to a funding process (Lenders pay a very close attention to this step is these set of documents, the legal contract, the compliance disclosures and the instruments are the ones empowering them to foreclose on a property in case of borrower’s default on payments). Funding is the processing wiring the funds to the escrow company for disbursement to parties, such as sellers in case of sale, pay off of any existing mortgage to a lender on the record, and to pay the closing costs for services and commissions due to people providing their services.
• The escrow company, upon receiving the funds from the lender, arranges for the recording of the instruments, such as deed of trust and a grant deed (in case of sales transaction) at the county recorder’s office. Upon confirmation of the recording, the transaction is deemed closed.

As you may be able to tell a real estate loan transaction is very complicated and has many moving parts with many people involved in it.  The more complicated it is, the more moving parts it has, the more people are involved, the more room it has for bottlenecks.

Bottlenecks may be caused by the following:

• Client’s fault
  • Lack of time
  • Lack of preparation
  • Lack of knowledge
• Complication of the transaction
  • Borrowers’ income & employment structure
  • Property’s title issues
  • Multiple borrower
• Incompetence of major role players and their assistants
  • Loan Officer
  • Loan Processor
  • Loan Underwriter
  • Escrow Officer
  • Loan Funder
  • Real Estate Agent (in sales transactions)
• Lack of streamline process
  • Online data collection
  • Online communication platforms
  • Need for manual underwriting and decision making
  • Need for exception to rules and guidelines
• Sheer volume of business driven by
  • Market condition
  • Individual businesses
• Lack of culture of respect for a lifetime value of a customer and customer care by the entities involved in the transaction
  • Lender
  • Escrow
  • Title
  • Appraiser

The causes outlined above are very much self-explanatory. As a client you have full control over your end of it and some control on certain aspect of it and absolutely no control over the rest.

Clients sometimes are not fully engaged in the transaction, it could be because they were talked into the transaction by a salesperson but not fully convinced of the benefits. In that case, the transaction is not a priority to them and they don’t give it the necessary time and attention to make it smooth for themselves and parties involved.  They may even have initiated the transaction on their own, but not wholeheartedly.

Some clients are not the most organized people and the information needed for the transaction is scattered all over the place and not readily available to them. When sending the information to the appropriate parties, instead of sending a complete set of information, they send them piece by piece. Most businesses, in this case lenders, do not review incomplete packages. It’s time consuming and counterproductive. If they do it, it’s an exception to the rules and it will not be a priority for them. 

Not everyone is a mortgage or a real estate pro. So, lack of knowledge on what loan options to choose and in how to communicate on explanation letters and correspondences does slow down the process. This and everything else explained above is in your full control (A good read on this topic is The 7 Habits of Highly Effective People by Stephen Covey).

The area you have no control over is the sheer volume of business driven by market condition and individual businesses. Market conditions are not in your control and neither is anyone’s business volume.  When the demand is high, the work slows down. Lack of staff has a lot to do with it. Then bringing new or temporary staff helps, but there is a training and orientation period and it takes time to catch up to speed. Other temporary setbacks and conditions such as COVID put a huge burden on all businesses and are totally out of everyone’s control. All you can do is to understand and cope with it the best you can.

With anything in between, where you may have some control, it starts with your homework upfront in choosing the right lender for your needs. The right lender for you may not be the same lender who worked with your neighbor or friend as your circumstances could be totally different. Working with the right lender is a starting point, but through the transaction, you need to make time for the transaction, stay on top of it, hold your service providers accountable and when there is an issue, don’t jump to conclusion and when there is a real problem, try to solve it with kindness and diplomacy. Refrain from using harsh words and pissing off people that have control over your transaction. Remember, you can catch more flies with honey than vinegar.

Should you have challenges with your qualification, don’t give up, connect with us. With over 30 years of experience and connection to numerous lenders with multitude of loan products, we’ll find you a solution. When there is a will, there is a way!  Michelle Yar – Mortgage Concierge