Step 10: THE LOAN PROCESS IN California FROM APPLICATION TO CLOSING

Step 10. THE LOAN PROCESS IN CALIFORNIA FROM APPLICATION TO CLOSING

When you buy a home, you will want to know the process from application to close.

Loan Application and Required Disclosures

As soon as the purchase contract is accepted, contact your loan officer and let them know you want to proceed with the mortgage application process. You are now contractually bound to close the purchase transaction by the agreed upon date. The legal term is “Time is of the Essence”.

Your loan officer will set an appointment to complete the loan application. This can be done face to face, by phone, internet, or mail. The application form primarily used for a mortgage is referred to as a 1003 (Ten-O-Three). It is officially known as Fannie Mae Form 1003, or the Universal Residential Loan Application.

The loan application contains the following sections:

Type of Mortgage and Term of Loan – The type of mortgages are Conventional, FHA, VA and USDA. This section also includes loan amount, the interest rate, the loan term (the period of time buyers agree to make regular payments), and the amortization type (commonly a fixed or adjustable interest rate).

Property Information and Purpose of the Loan – This section contains the property address and other information related to the home. It will cover the purpose of the loan (typically purchase vs. refinance), and how buyers intend to occupy the home (primary residence, second home, or investment property). It will also cover how buyers will hold the title and source of funds required to close on the loan. This amount includes the down payment.

Borrower Information – This section is where buyers provide personal information such as name, social security number, date of birth, years of school completed, marital status, how many dependents they have and their ages, the address(es) where they have lived for the last two years, mailing address, and whether they rent or own where they currently reside.

Employment Information – Buyers will provide employment information that includes the name and address of the company where they work, job title, work phone number, and length of employment. This information must be provided for all jobs held within the last two years.

Monthly Income and Combined Housing Expense Information – This section will detail a buyer’s current disclosed sources of income, their current rent or mortgage payments, and the proposed payments for the new loan. It will break down the payment into any of the applicable items such as principal and interest, taxes, insurance, mortgage insurance, and monthly homeowner association dues.

Assets and Liabilities – This section covers disclosed assets that buyers intend to use for loan approval requirements. Buyers are required to disclose all current liabilities with obligated monthly payments in order to determine ability to repay the loan. Any existing real estate must be provided as well.

Details of Transaction – This section covers various details of the mortgage loan including the purchase price, closing costs, loan amount, and amount of required cash to close. Details are completed by the loan officer for the buyer’s benefit. Review and make sure you understand this information.

Declarations – This section asks buyers a series of standardized questions related to any current legal issues, any past or recent major credit issues (such as bankruptcy or foreclosure), any other debt obligations not previously disclosed in their liabilities, if they are a US citizen or permanent resident alien, if they intend to occupy the property as your primary residence, and if they have owned property in the last three years. Buyers are required to answer Yes or No.

Acknowledgement and Agreement – In this section, buyers acknowledge that the provided information is true and accurate and that lenders can verify their information by signing and dating the application.

Information for Government Monitoring Purposes – Information related to a buyer’s ethnicity, race and sex is requested by the Federal Government to monitor whether or not lenders are in compliance with equal credit opportunity laws, fair housing, and home mortgage disclosure. Buyers are not required to furnish this information, but they are encouraged to do so. It is illegal for a lender to discriminate based on this information.

Along with the loan application, various disclosure forms will be provided. The forms received are determined by which loan program the buyer is applying for, the different federal laws, and the laws governing mortgage lending in the state where the property is located.

Below is a list of various disclosures you will receive at the time of application.

Truth In Lending Act (TILA) – Initially passed in 1968 and revised various times since, this federal law requires mortgage lenders to disclose rates, terms, and fees in a standardized manner to protect borrowers and allow them to make more informed decisions.

Real Estate Settlement Procedures Act (RESPA) – This act was put in place in 1975 to provide additional protection to borrowers. It requires mortgage lenders to disclose relevant costs within certain timeframes and in a specific manner. It also prohibits kickbacks in real estate transactions.

TILA-RESPA Integrated Disclosure rule (TRID) – Also known as TRID, attempts to alleviate the difficulties of borrowing by simplifying and combining certain TILA and RESPA disclosures. New disclosure requirements are implemented and imposed by the Dodd-Frank act. For example, in the past, mortgage lenders would provide a disclosure called a Good Faith Estimate and Truth-In-Lending disclosure that covered the rate, term and finance charges at the time of application. Both forms have been replaced by one disclosure called the Loan Estimate.

Equal Credit Opportunity Act (ECOA) – Originally enacted in 1974, this law prohibits discriminatory lending practices against women. Since then, it has been amended to add more classes. It is now unlawful to discriminate against a loan applicant with respect to sex, marital status, race, color, religion, national origin, age (provided the applicant has the capacity to contract), or because all or part of the applicant’s income derives from any public assistance program.

Fair Housing Act – Title VIII of the Civil Rights Act of 1968 prohibits lenders from considering a buyer’s race, color, national origin, religion, sex, familial status, or disability when applying for residential mortgage loans.

Home Mortgage Disclosure Act (HMDA) – HMDA requires financial institutions to report information collected on mortgage applications to make sure they serve housing credit needs of the communities in which they are located. Collection and disclosure data about borrower characteristics is required to help identify discriminatory lending patterns as well.

Fair Credit Reporting Act (FCRA) – FCRA aims at promoting the accuracy, fairness, and privacy of information contained in consumer reporting agencies.

Fair and Accurate Credit Transaction Act (FACTA) – FACTA passed in 2003, and amends the Fair Credit Reporting Act. It allows consumers to request and obtain a free credit report every twelve months, and contains provisions to help reduce identity theft, which require secure disposal of confidential consumer information.

Gramm-Leach-Bliley Act (GLB) – The GLB Act ensures security and confidentiality of customer information by requiring financial institutions to maintain reasonable policies and procedures, and to disclose their information sharing practices to consumers.

Homeowners Protection Act – The Homeowners Protection Act establishes provisions for private mortgage insurance cancellation by establishing disclosure and notification requirements.

The USA Patriot Act – The USA Patriot is an acronym for Uniting and Strengthening America by Providing Appropriate tools Required to Intercept and Obstruct Terrorism Act of 2001. This amended the Bank Secrecy Act of 1970 in order to combat terrorist financing. As a result, financial institutions must request information to verify the identity of mortgage applicants and alert law enforcement when suspicious activity or individuals are identified. Lenders must also disclose this information to applicants and tell them they are doing this to comply with the Patriot Act.

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) – In response to the 2007-2008 financial crisis, the SAFE Act was passed to create nationwide licensing requirements for mortgage loan originators (loan officers). A nationwide registry called the Nationwide Licensing System (NMLS) was created and requires that all loan officers obtain an identification number for the system and disclose their NMLS ID to borrowers. It also allows consumers free access to the database to look up employment history of a loan officer, as well as any publicly adjudicated disciplinary action.

California Specific Mortgage Disclosure Laws

Advance Fees Disclosure – California law requires a mortgage lender to notify an applicant in writing if any fees are required to be paid in advance (before the closing appointment when final loan documents are signed) in connection with a mortgage application. There must be a written agreement that details the amount charged for the application, an appraisal, and a credit report. Further, the agreement must specify if the fees are refundable or non-refundable, whether the loan is closed or not, and explain the conditions for the return of advance fees.

Authorization to Complete Blank Spaces – California law says that it is fraudulent for a mortgage company to require or permit an applicant to sign any document (other than specific verification forms) that contain blank spaces that are to be filled in after it has been signed. However, the borrower can sign a document allowing the mortgage company to fill in blank spaces if it specifically states what spaces can later be filled in by the mortgage company.

If the borrower has provided the following six pieces of information on their loan application, the lender is required by federal law to provide you a Loan Estimate within a specific time frame. This information includes: (1) name, (2) income, (3) social security number, (4) the property address, (5) an estimate of the value of the property, and (6) the loan amount requested. A Loan Estimate is a form that you receive after applying for a mortgage. It contains the most important details about your mortgage such as your estimated interest rate, monthly payment and closing costs.

The Consumer Financial Protection Bureau offers a good tool that explains the Loan Estimate here.

It is important that you review and sign the disclosures as soon as possible, since they will expire after a certain point. Make to understand what is being signed. Your loan officer can answer any questions.

There are various documents you will need to provide when applying for a loan. Because each individual’s employment and financial situation is different, the required documents can vary. Below is a comprehensive list of documents known as “Mortgage Paperwork” or “Needs List Items”.

Standard Documents Required To Support Your Mortgage Application and Obtain A Mortgage Loan Approval:

• Employment history for the last two years (name of employer, address of employment and phone number, gaps in employment)
• Paycheck stubs for the last 30 days (most current)
• W-2’s for the previous two years
• Signed personal tax returns (including all schedules) from the last 2 years
• Checking and saving account statements for last 2 months (all pages)
• Any assets used for down payment, closing cost, and cash reserves must be documented by a paper trail
• Residency history over the last two years, with name and contact information of landlord (or copy of most recent mortgage statement)
• Legible copy of photo identification for applicant and co-applicant
• Copy of signed purchase contract (with all addendums)
• Name, phone number and email address of your real estate agent
• Name, phone number and email of your insurance agent

Additional Documents Typically Requested If Self-Employed:

• Copies of most recent corporate tax returns for the past 2 years (with all schedules including year-to-date profit & loss)
• Year-to-date profit & loss statement and balance sheet
• 1099s if applicable

Documents Typically Requested For VA Loans:

• DD214 & Certificate of Eligibility

Other Documents That May Be Required Upon Request:

• Letters of explanation for recent credit inquiries, derogatory credit, address discrepancies, employment gaps, non-sufficient funds notifications, etc.
• Documentation supporting money received from social security/retirement/disability, i.e. copies of direct deposit bank statements, awards letter, evidence income will continue for at least 3 years.
• Statements for 401(k)s, stocks, other investments (most recent)
• Relocation Agreement if move is financed by employer, i.e. buyout agreement plus documentation outlining company paid closing costs benefits
• Previous bankruptcy, need copies of petition for bankruptcy and discharge, including supporting schedules
• Divorce Decree if applicable;
• Rental property copies of leases plus mortgage information.

Locking Your Interest Rate

Once buyers have an accepted contract and completed application, it is standard to lock in at their interest rate. Since mortgage rates change frequently, and if you want to be sure you get the same rate as when you applied, you can obtain a rate lock. This is a commitment from the lender that that your rate won’t change between the time you lock the rate and during close, as long as you close within the specified time frame and there are no changes to your application.

Locking your rate at the time of application gives you the peace of mind that your interest rate won’t increase while you wait to close. However, it also means you wont be able to take advantage of lower rates. You can float your interest rate. This is when you choose not to lock the rate. By doing so, your rate isn’t guaranteed, so if rates go down, you can close with a lower interest rate. Likewise, if rates go up, you will close with a higher interest rate. In this context, lock vs. float is referring to before the final loan documents are signed. This It is not the same as obtaining a fixed vs. variable rate for the life of the actual loan.

To check if your rate is locked, look at the top of page 1 of your Loan Estimate. It will tell you whether or not it’s locked and for how long.

Be aware that if the information the lender relies upon changes, your rate may change too. If a change occurs after you have locked your rate, make sure you talk to your loan officer to see if your rate lock is still valid.

Finally, if your rate lock expires before you close, you can extend the date. There is typically a cost to extend the rate lock. Again, talk to your loan officer to find out what your options are.

Loan Submission to the Operations Department

After the signed loan application and disclosures are delivered to your lender, he or she will organize the loan file and prepare to submit it to the mortgage operations department. The operations department typically consists of a processing, underwriting and closing team.

Loan Processing

The loan processing team is in charge of preparing the file for underwriting. They make sure the information and documentation provided is complete, accurate, and has not expired. They will most likely contact you for additional documentation.

The team will also verify information provided on your application (ex. employment, tax transcripts, rental history and bank balances).

Finally, they will request whatever information is needed to support the loan file, which can include title insurance, homeowner’s insurance, appraisal report, flood certification, government loan program items, and down payment assistance.

Once the file is ready, it will be turned over to the underwriting team.

Loan Underwriting

The underwriter will provide the final approval of your loan application. Approval depends on the level of risk involved in offering the loan.

The underwriter ensures the loan files meets all requirements for the selected loan program. This includes guidelines set by the mortgage lender, the government agency that guarantees the loan, the agency that offers California down payment assistance, and the investor who will purchase the loan once it closes.

After the underwriter has reviewed the loan file, they will issue an approval subject to additional concerns. This means more information is needed in order for a final approval. Your mortgage lender will contact you about additional steps needed for final approval. Once the conditions are met, the final approval will be issued in what is commonly referred to as clear to close.

Loan Closing

Once the loan is clear to close, the lender will provide you with a document called a Closing Disclosure. By law, this must be provided three days prior to the date of loan closing. This five-page form provides details about the loan, including: loan terms, projected monthly payments, how much you will pay in closing costs, how much money is needed to close, and any additional important information.

The Consumer Financial Protection Bureau offers a good tool that explains the Closing Disclosure here.

After the Closing Disclosure has been signed, your mortgage lender will prepare the loan documents and send them to the title company that was indicated in your purchase contract. The title company will arrange for you and the seller to sign the required paperwork. Instructions for how to deliver the money need to close the transaction will be sent. Once they have the signatures, the necessary documents have been recorded with the county, and all monies are accounted for, you will receive the keys.

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Legal Disclaimer

This home buyer series is intended to provide general information regarding the process of how to buy a house in California. It is not intended to provide buyers with legal, accounting or financial advice. You are advised to seek the services of a skilled professional this those fields.

Additionally, this home buyer series does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.