Ok, if you’ve ever refinanced, you’ve probably wondered at some point just what the hell goes on between the time you complete an application and the time your loan funds. I mean, if you’ve had a half-way decent loan officer, he or she has probably given you a little insight, but nowhere near what I’m going to tell you. Now, keep in mind, this is the process your file goes through if you’re dealing with a mortgage broker; maybe someday when I feel like writing about something boring I’ll key you in on what goes on at a bank, but to be quite honest, I don’t really know because I’ve never worked at one thank God. I’ll keep this concise, but if there are any questions, by all means, fire away in the comments section. On with the show…

After The Application:

So you’ve spent a boring hour while your Loan Officer takes down a complete 1003 (pronounced Ten-oh-three), also known as a Uniform Residential Loan Application. If you’re lucky that Loan Officer at least made an attempt at keeping you from tearing up with boredom and took the opportunity to get to know you a bit during the process. Once the application is complete, you hang up the phone and the LO goes to work.

At this point your Loan Officer is in a position to accurately research the loan program that suits you best. By the way, for all you weirdos out there that call brokers and ask what their rates are, if you haven’t gotten at least to the application stage, any rate-quoting is merely a tactic to keep you interested. Realistically, rate and program qualifications cannot be determined without a complete application, especially in the current market, so don’t ask and expect a real answer. Anyway, back to business. Now your LO either contacts as many Lenders as possible through some sort of automated system or he contacts just a few of the lenders he thinks, based on his experience, offer the best rates for the loan program that suits you best.

The Broker – Account Executive Relationship:

When Mortgage Brokers, or Loan Officers working for a Mortgage Broker, contact a lender, they don’t just call customer service and get the rates of the day…that would be too easy. The banks/lenders your LO deals with are the Wholesale Divisions of that bank, which is completely different from the side of the bank that the average consumer deals with. Your LO has one assigned contact at each lender he does business with, that contact is called an Account Executive, or AE. AEs relay pricing information to the LO and are the “experts” on a given lenders programs; I put the word “experts” in quotes because, all too often, AEs have no idea what they’re doing. Essentially, AEs act as liaisons between the lender and the LO; the Loan Officer is the AE’s client, just like you are the loan officer’s client.

After The Loan Has Been Researched:

I’ll go into what’s involved in researching a loan in another post, because it can be complicated, for now we’ll just move on to the “after-research stage.” At this point, the LO analyzes the programs he’s researched and figures out the best way to present these options to the client, whether that be via email, telephone, mail, or whatever the hell he comes up with. In an ideal world, the client choses the program he or she likes best after short deliberation, hangs up the phone, and the LO puts together a set of disclosures to send to and have signed by the client.

Submitting The Loan:

After you’ve signed and returned the disclosures to your LO, he moves onto the submission stage of the loan process. If you’ve ever heard an LO talk about his processor, this is where she comes into the picture. The LO decides to lock or float the interest rate at this point and then hands the file off to his processor to be submitted to the lender. A good LO will have all the potential problems with your file worked out before he hands it off to his processor, and a good processor will review the file before submission as a last line of defense; once the file is submitted, it can be too late to correct any issues that may cause your file to be declined by the lender. A good processor takes over the file almost completely at this point and updates your LO with the progress; the better a processor is, the less the loan officer has to be involved in the post-submission process.

The Processor’s Job:

Now the waiting begins, at least on the part of you and your LO; the processor’s job, on the other hand is just beginning. The processor handles things like opening title and escrow, ordering verifications of employment, and supplying the lender with any requested conditions.

The Four Steps In The Approval Process:

A loan processor has four major steps to complete before your loan closes; all presenting varying degrees of difficulty and frustration depending on the specifics of your file. The four steps are Submission, Approval, Docs, and Funding, and we’ve already went over the submission process, so let’s tackle the three others.

Approval:

Once your file is submitted, the processor waits, and depending on the lender, waits some more, for news back from the lender that your loan has been approved. The lender will usually issue one of two types of approvals, either a conditional approval or just an approval. When the lender issues a conditional approval, it means that the loan is approved on the condition that certain things happen. Usually those things involve submitting more documents to the lender. If you’ve ever wondered why your LO calls you late in the loan process asking for you to send in more documents, it’s probably because the lender issued a conditional approval and those documents are required to meet the lender’s conditions. In addition to a conditional or full approval, the lender may issue Prior to Doc and Prior to Funding Conditions; these are conditions that don’t need to be met for an approval but must be met before the lender will send out your loan documents or fund your loan.

Docs:

After your loan is approved, the processor fills the Prior to Doc Conditions, if any, and orders your loan documents from the lender, she also lines up a notary for your signing at this point. The lender sends your loan docs to the escrow company and sends a HUD-1 to the processor; the HUD-1 is a final breakdown of the terms of the loan. Your LO should call you at this point to go over the HUD-1 and ensure everything appears as expected. The notary picks up your loan docs from the escrow company and heads to the signing location, at which point you sign the loan docs. Meanwhile, the processor is working on filling the prior to funding conditions, if any, issued by the lender.

Funding:

Most loans come with a 3-day Right of Rescission, meaning even after you’ve signed your loan docs, you usually have 3 full days to change your mind, or rescind. As an example, if you sign docs on Thursday morning, the 3-Day Right of Rescission begins the next day, so it’s in effect on Friday, Saturday, skips Sunday, and Monday. In this example your loan funds on Tuesday. After the 3 full days have elapsed, and the processor has submitted the Prior to Funding Conditions, if any, your loan funds the next day. One day after that your loan is recorded in public records. Public records? That’s right. Have you ever received phone calls from brokers/lenders soliciting your business and they seem to have a bunch of information about your loan that you never gave them? They usually get that information from public record; you’d be surprised how much of your information is accessible this way. The recording date is also the day your Broker/Loan Officer’s paycheck is sent out for delivery (or wire transfered if your Broker is smart ).

Wow, did you get all that? If not I’m happy to answer questions posted in the comments section. Just don’t ask me what kind of rate I can get you .

1. Because both lenders and brokers will lie to you.
   • That’s right, even the big lenders will lie to retain clients or get new ones and they get away with it everyday.I see it happen almost every day, and I’m just one broker in one city in the entire Untied States. Not sure if your mortgage professional is being truthful? Post a comment and I’ll let you know what I think.
2. Because Interest Rates Change Every Day, Sometimes Several Times A Day
   • I can tell you from experience that Lender A’s rates can be lower than Lender B’s on Monday and the opposite may be true on Tuesday. So you get a quote from Lender A on Monday of 6% and a quote from Lender B on Tuesday of 6.25%. Who do you go with? Well, most people would go with Lender A, right? The problem is Lender A may not actually have the best deal, you just happened to catch them on a day when rates were down. Lender B may very well have lower rates in general, but you’d never know that. This is where a good mortgage broker comes in. A good mortgage broker tracks interest rates from different lenders every day for his or her entire career. He knows which banks tend to have the best programs available at any given time. In my case, if I’m not sure who has the best programs available considering market conditions on a particular loan program, I can send an inquiry to all of my lenders and get several hundred quotes in about 20 minutes (of course, then I have to sort through all those quotes, which can take a couple days). The point is, a broker can compare apples to apples whereas consumers can only compare apples to oranges…not effective
3. Because You Really Don’t Know Who You’re Talking To
   • How well do you know that person on the other end of the phone who’s quoting you rates? Don’t make the mistake of thinking Mortgage Broker’s have an easy job. To be truly effective, a Broker has to be on top of market conditions at all times, he has to have a thorough understanding of all the programs offered by his lenders, and most importantly, he has to be able to foresee problems with a file before they rear their ugly heads (because almost every file has a problem), and they have to be able to merge all this information into a clearly defined “mortgage plan” for their clients. I can tell you from experience, good mortgage brokers are few and far between. Have you ever been told what index your new Adjustable Rate Mortgage will be attached to? It’s information that may be important, and I’d be willing to be that in 80% of refinance transactions, the homeowner has no idea what index his or her loan is attached to; for no other reason than the broker didn’t know either.
   • Put it this way, if you were unlawfully charged with a serious crime, are you going to hire a $20 lawyer who makes his money on volume, who isn’t going to give your case the attention it needs, who’s going to clean his hands and walk away as soon as he files the paperwork and shows his face in court? Or are you going to pay extra for a lawyer to carefully consider all the details of your case and help you work to find the best way into a better position; a lawyer who knows your situation like the back of his hand and can let you know, if the laws relevant to your case change, that you should to take a different approach than originally planned; a lawyer who, after your case is over, isn’t going to walk away with his check and never speak to you again, he’s going to help you with appeals or fines, or any other issues you may have when the case closes, as well as offer advice in the future? Obviously, that’s your choice, but when you chose a broker based solely on the lowest cost, you’re representing yourself in the legal system known as the mortgage market on a case that involves what is likely your biggest investment (your home); and when is the last time you thought it would be a good idea to represent yourself in court?

Let’s say you submit an application on LowerMyBills.com or LendingTree.com because you want banks to compete over you, right? That application is then sold to around 5 other companies who all race to be the first one to contact you. Ever wonder why you may receive phone calls less than 2 minutes after submitting an application at LowerMyBills.com? Because the Loan Officers (LOs) are taught that, statistically, the first person to have a meaningful conversation with you is more likely to get your business; and it’s true…statistically. Plus, by the time the 5th LO calls you, you’re so annoyed by the unleashing of World War III on your phone that you’re a tough sell.

Anyway, that first week you complete an application with 2 of those companies so they can get you a more accurate projection of rate and costs in the form of a Good Faith Estimate. But after that, you’re slammed at work or little Johnny’s sick and needs your attention, so you can’t speak to the other 3 companies for a while. A month later, you’ve completed 5 applications with the original 5 companies and had your credit run 5 separate times.

“But more than 5 people called me – you said my application was sold to only 5 companies. So how did the other 15 companies get my information?”

There are a couple answers to that. Some companies subscribe to a service offered by the credit bureaus that notifies them a couple days after a mortgage credit report is pulled. So company 1 pulls your credit for your application on the 15th; on the 18th, company 6 gets a notification that you’re shopping for a mortgage and calls to try and get in on the action. But it’s not just company 6 that gets that notification; it’s companies 6 through 18 – and they all call you.

Then, and this does happen, there is the “mortgage sales lead black market.” Some disgruntled or underpaid employee at one of those 18 companies that have now contacted you decides that he needs to make more money and sells your info to one of his buddies at another mortgage company. It’s illegal, but it happens. So you get two more calls.

You assume all 20 companies calling are a direct result of your LowerMyBills.com application, when, in fact, only 5 are directly responding to the application you submitted.

On top of the original 5 companies that ran your credit, you liked what 3 more of the “second hand” callers had to say; so you complete an application with them and they run your credit.

You’ve now had your credit run 8 times over the course of a month or so; as a result, your credit score suffers – sometimes dramatically.

Well, how can I avoid doing damage to my credit score when shopping for the best rate on a mortgage? Do all your shopping within a 2-week time frame. The credit bureaus count inquiries of the same type – in this case for a mortgage – within a 2-week span as only one inquiry. Some Loan Officers may tell you not to have other companies run your credit because your score may drop, but that’s only partially true. As long as all those inquiries occur within one 2-week time frame, you’re golden.

“Ok, that’s easy, I’ll just keep all of my mortgage shopping within a 2-week period and I’ll be fine, right?” Not really…but I’m tired of writing and that’s the topic for part 2, tomorrow, when we cover how you may be weeding out the best mortgage brokers. After that I’ll wrap up the Mortgage Shopping Series is part 3 by showing you how to really shop for a mortgage.

Thanks for reading!
John Crenshaw, TruthfulLending dot Com