The Mortgage Loan Process

The mortgage process includes several steps:

  1. Finding a lender. It is important to evaluate multiple lenders before choosing a lender, as lenders typically have various mortgage offerings
  2. Determine which mortgage best suits your needs
  3. Determine whether to get pre-approved or pre-qualified
  4. Complete the loan application. In order for your lender to start your loan file, order an appraisal on your desired property, and then you will need to complete the loan application for the desired mortgage
  5. Underwriting. Once you have completed your application, the mortgage officer will send your loan application, including your appraisal report to an underwriter, who will determine whether or not you are approved for the mortgage
  6. Closing. This is the final step and it includes the signing of loan documents, recording the mortgage and title, purchasing the mortgage and property insurance and funding your down payment


There are 4 different types of lenders:

  • Online lending lead services – online only
  • Mortgage brokers – brokers, who typically work with multiple sources of capital
  • Banks – most banks offer a variety of mortgage offerings
  • Non-bank mortgage lenders – these are companies which specialize in home mortgages

Each type of lender can help you to obtain mortgage in different ways.

When choosing a lender, there are several things a homebuyer must consider, some of these things are:

  • APR (Annual Percentage rate)
  • Different types of loan terms and duration
  • Fees and closing costs

Some important questions to ask lenders as you evaluate which one is best for you:

  • What are the fees?
  • Are the fees paid upfront or are they included in the mortgage?
  • How long will each step of the mortgage process take?
  • What are the down payment options?

Common types of mortgages

Fixed rate mortgage

A fixed-rate mortgage offers a consistent interest rate for the entire life of the loan, which means that your total monthly payment of principal and interest will remain the same over time. If you plan to stay for a long time in the home you’re buying, or want a consistent mortgage payment amount, a fixed-rate mortgage is usually the way to go. Fixed-rate mortgages are available for various durations: 10, 15, 20, or 30 years. Loans with longer terms usually have a lower monthly payment, but a higher overall repayment amount, because you’re paying interest on the amount borrowed over a longer period.

Adjustable Rate Mortgage (ARM)

If you get an adjustable-rate mortgage (ARM), the interest rate can change and, most likely will, over the life of your loan. Depending on your loan terms, your interest rate could remain unchanged for the first adjustment date, such as 3, 5, or 7 years. It could change as often as every six months throughout the rest of the 30-year period. While an adjustable-rate mortgage may start off with a lower interest rate, it could increase, which can increase your payments. Borrowers may choose to go with an ARM when they don’t plan on staying in a home long-term, or if they expect their incomes to increase in the next few years.

Interest Only (IO)

An interest-only mortgage has an initial period at which your payments only cover the cost of interest, and they don’t go toward the principal amount you owe. Initial rates are often lower than fixed-rate mortgages. Usually, this can mean that your payments are smaller in the beginning, and then at the end of the interest-only period, they increase significantly to include both interest and principal payments. Some may even require a balloon payment for the entire balance. Interest-only mortgages are less common, and they can add risk because borrowers need to be prepared for the higher payments after the interest-only period ends.

Government Guaranteed

If you have income restrictions, currently serve in the military, or are a military veteran, the Federal Housing Administration (also known as FHA) and Department of Veterans Affairs (also known as VA) offer loans with unique benefits and additional flexibilities around credit and income guidelines that could help you purchase a home. Usually, you will have a lower down payment and qualifying guidelines that are more flexible than what you might be eligible for with a private lender. Make sure to let your lender know if you think you qualify for this loan type.

Pre-qualification vs Pre-approval


Pre-qualification gives you an idea of the amount you may be approved for, which indicates the maximum price of the home you may purchase.

Pre-qualification is often quick, for a lender to pre-qualify you, the lender will need information about your income, your assets as well as your credit score.


Pre-approval lets the lender let you know whether or not you will be approved for a specific loan. For pre-approval, you will need to provide the lender with detailed information and document supporting your income, your assets such as bank accounts, and the lender will closely analyze your credit report.

The pre-approval process often takes longer then the pre-qualification process.

Important Mortgage Terms

Annual Percentage Rate

An annual percentage rate (APR) is an even “bigger picture” view of the total cost of borrowing money and can be useful when comparing mortgages that look similar. It reflects many, but not all, of your costs as an annualized rate. It can include the interest rate, points, mortgage broker fees, and closing costs, as well as other fees you may pay for the loan. Since these costs are included in your APR, your APR is typically higher than your interest rate. Two lenders could be charging the same interest rate, but the lender that is charging more for other fees will have the higher APR. That’s why it’s always important when comparing lenders to look at the APRs quoted and not just the interest rate.


Points come in two forms: origination points and discount points.

Origination points are applied toward costs that lenders incur for processing, underwriting, and approving your loan. These points can be a percentage of the loan amount or a flat fee. Keep in mind, if you include your closing costs in your loan, you will be paying interest on those costs over the life of the loan.

On the other hand, mortgage discount points are purchased to lower the mortgage interest rate. The cost of a point is usually calculated in relation to your loan amount; typically, one point equals one percent of your loan amount. For example, if your mortgage amount is going to be $125,000, then one point would equal $1,250. If you are considering applying points to your loan, be sure to talk to your lender to determine if it is the right approach.

Loan Amortization

Amortizing a loan means paying it off in regular installments over a period of time. With each installment, a percentage of that amount goes toward paying off your principal and the rest toward interest. Your lender will most likely create an amortization schedule that shows how much of each payment goes toward the principal and how much goes toward interest. Typically, more goes toward interest in the beginning, with less money going toward the principal. Then, eventually, as the balance goes down more of your payment will go toward paying off the principal and less toward interest.

Private Mortgage Insurance

If your down payment is less than 20% of the home purchase price, you may need to get mortgage insurance. Mortgage insurance protects the lender in case you stop paying your home loan, and it’s typically paid along with your monthly mortgage payment. If you fail to make payments, even with mortgage insurance, your credit score could suffer, and you could lose your home to foreclosure. While it’s an additional cost, it may help you get a mortgage with a lower down payment. Depending on the terms of your loan and mortgage insurance, some loans allow you to cancel the insurance once you’ve reached 20% equity, which could mean extra savings down the line.

Mortgage Payment

Your monthly mortgage payment is typically made up of four components: principal, interest, taxes, and insurance. The principal is the money you borrowed, or the amount financed. The interest is what the lender charges you to borrow the money used to purchase the home. Taxes are what you pay in property taxes to your local city/municipality and sometimes county. Insurance is what you pay to insure your home from damages, such as fire or natural disasters. For conventional loans, depending on your loan terms, if you put less than 20% down, then mortgage insurance (MI) will also be included in your monthly payment until you reach the 20% equity threshold. If your loan requires MI then you’ll want to pay attention to the equity in your house to know when you’ve reached that 20% loan-to-value threshold so you can ask to cancel the MI payment.

Many lenders help borrowers to set up a separate escrow account to pay for estimated taxes and insurance. This alleviates borrowers from having to remember to pay their real estate taxes and homeowner insurance premiums. Since the amount is estimated, borrowers may be billed if there is a shortage. This amount will normally adjust through the life of the loan.

A monthly mortgage payment is comprised of the following:

  1. Principal
  2. Taxes
  3. Interest
  4. Insurance

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