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The Real Estate Lending Process

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Qualifying for a real estate mortgage loan involves a specific process involving a number of parties and qualification standards. Let's take a look at how lender's qualify and approve a borrower for a particular loan.

Real Estate Lending

Luke is getting ready to buy a house and has begun researching mortgages. He has reached out to a lender and was quickly told about the pre-qualification and pre-approval process along with what people and tasks are involved. Let's break down how lenders determine Luke's eligibility to borrow money and the different people involved in completing a loan package.

Pre-Qualification and Pre-Approval

The first thing Luke's lender will do is pre-qualify him for a mortgage. Before a creditor is going to put significant time and energy into working on a loan, the lender will want a general idea that Luke meets established borrowing guidelines. Pre-qualification can be done over the phone and involves asking Luke about his income, assets, and current debts. This is typically free and doesn't require complicated paperwork. If it's obvious that Luke doesn't make enough money to afford a home or has too much debt already from just a casual look at his finances, the lender won't proceed further.

Pre-approval is often confused to mean the same thing as pre-qualification, but it isn't. To be pre-approved for a loan Luke will need to authorize the lender to pull and review a copy of his credit report. The details of the report will confirm Luke's existing debts and payment history while the credit score based on the report often influences the interest rate offered. He will also need to submit a detailed application that includes information about his finances as well as work and income history.

One important factor that a lender will consider is Luke's debt-to-income ratio. Borrowers often use government guaranteed loan programs such as Veterans Administration or Fannie Mae loans and these organizations require borrowers to have a debt-to-income ratio no greater than 43%. Let's say Luke earns $60,000, which is $5,000 a month. 43% of $5,000 is $2,150, which is the most money Luke will be able to spend each month on debt including the mortgage and still qualify. If Luke has a $500 car payment, a $300 student loan payment, and a minimum credit card payment of $250 a month this sum of $1,050 in monthly debt will reduce his maximum loan payment to $1,100 a month.

Lenders often charge a fee for submitting an application so that they don't lose money if the loan falls through, although this fee can often be paid at closing or waived through a credit at closing. With pre-approval in hand, Luke will know how much money the lender will give for a loan and can begin shopping for homes. As he proceeds with his real estate search, multiple other parties are involved in processing the loan.

Parties

Luke happened to approach a lender directly. A lender refers to a particular financial institution which is making the loan and is also known as a loan originator. An alternative would have been for Luke to use a mortgage broker. A mortgage broker would take Luke's application and shop around to various lenders on Luke's behalf for the best possible rate. The difference is that the broker isn't the one loaning money out, but instead takes the burden off of the buyer to find the best deal on financing.

Once the application is in, an underwriter will take over the process of handling the loan. The lender loan officer is there to sell loans and get applications, the underwriter's job is to make sure the loans meet institutional and government standards that reduce the risk of default on the loan. The underwriter will order an appraisal, receive a title search and insurance policy, confirm if the property is in a flood zone, and order a survey on the property. When the underwriter is satisfied that these are in order Luke can proceed to close with the financing all set.

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