The mortgage life cycle is the series of stages that a mortgage passes through starting with the mortgage loan application all the way to the loan’s final payment. Although different mortgages feature different loan terms and interest rates, every mortgage follows the same general life cycle or mortgage loan process. The process of taking out a mortgage consists of 5 major stages called the mortgage loan cycle. These stages include submitting the mortgage application, mortgage loan processing, underwriting, closing, and loan servicing. Let us look into each part of the mortgage life cycle in greater detail to gain a complete understanding of what it entails.
Mortgage Loan Application
The mortgage life cycle begins with the borrower’s mortgage application, which will be the 1003 form or the Uniform Residential Loan Application. In it, they will have to provide their personal details, the type of mortgage they are looking for, property information, employment information, streams of income, assets and liabilities, details of the property transaction (purchase price, closing costs, principal, etc.), and declarations of any lawsuits or bankruptcies. Through this application, a lender can choose to pre-approve their mortgage loan. This means that they can provide a pre-approval letter to the seller of the property to establish that their interest in the property can be backed by the finances necessary to take it off the market.
Mortgage Loan Processing
This stage of the mortgage loan process involves collecting all the required documentation to support the borrower’s application and ensuring that all the sections of the application submitted are filled. The mortgage processing company will also make it a point to cross-check all the information provided in the application and order credit reports and appraisals at this point. The appraisal is an expert’s evaluation of the new home’s current market value. It is important because lenders want to make sure that the loan they grant the borrower does not exceed the market value of the new home. Some additional documents the borrower will have to provide include statements of debts and assets, proof of income, proof of insurance, and tax returns.
A mortgage underwriter will analyze the borrower’s mortgage application to determine whether the terms of the loan are acceptable. The key objective at this stage is for the lender to avoid as much undue risk as possible. Underwriters look at 3 criteria to assess a borrower’s risk – capacity, credit, and collateral. Capacity means that the borrower has the means or income with which to cover their mortgage payments. Credit involves looking into the borrower’s past bill payments to predict their ability to pay off their future bills. Collateral involves checking whether the value of the property being financed meets the loan-to-value requirements of the mortgage loan. Underwriters determine whether a mortgage loan gets approved or not.
Upon approval, the file is transferred to the closing department and the property title is transferred from the seller to the borrower. A Closing Disclosure containing all the costs related to the purchase such as the amount financed, loan fees, annual interest percentage rate, real estate taxes, finance charges, and the payment schedule is issued. A Promissory Note that is legal evidence of the borrower’s mortgage and their pledge to repay it is also signed. A Deed of Trust is also issued, where the borrower pledges their new home as a security for their loan. The loan is then funded, and the debt becomes the borrower’s legal responsibility. The new home now has a legal lien attached to it in the name of the lender who issued the mortgage.
This stage of the mortgage loan process ensures that the mortgage is repaid in full. This repayment period lasts anywhere from 15 to 30 years, depending on the loan type and the amount borrowed. Loan servicing involves sending statements, processing mortgage payments, and managing escrow accounts. It also entails providing collections services on delinquent mortgages and ensuring that property taxes and insurance payments are made on time. Furthermore, it includes covering other costs related to the loan agreement such as payment penalties for late or missed payments. Once the mortgage is repaid in full, the lien is removed, and the borrower owns the home completely.
Mortgage loan processing consists of 5 stages that work hand in hand. It usually spans a minimum of 15 years and involves a number of processes that include submitting the mortgage application to underwriting and repaying the entire mortgage loan amount. Because it can be an elaborate task to manage, it is best left to mortgage outsourcing professionals that have a wealth of experience in the field.