The mortgage loan process involves many steps from generating money from the investors to process the loans to the borrowers. The entire process is explained below
Origination: Loan Origination is the first step of this cycle. It is the process by which a borrower applies for a new loan and a lender or bank processes that application. It actually includes all the steps from taking a loan application through disbursal/declining of funds.
To apply the loan, the borrower has to fill some application in advance. The borrower typically sits with a sales agent who assists him in completing the application form, selecting appropriate product options (such as payment terms and rates), collecting required documentation selecting add-on products (such as payment protective insurance ), and eventually signing a completed application.
Processing: Processing is the collection of the documentation and verification to support information provided on a Loan application. Some of the required documents to process mortgage loans are
Loan application. Like in USA, URLA – 1003 which is the Uniform Residential Loan Application provided by Fannie Mae
Verification of Income and Employment
Underwriting: Underwriting is the evaluation of loan documentation provided by the lender that approves or denies the loan. It will result in the approval or rejection of the Loan. However there are certain key factors that drive this process. These key factors can be also called as the 5C’s.
Capability: it refers to the borrower’s ability to repay the loan based on sufficient income. Loan processor has to verify the income information in the loan application.
Capital: it refers to the borrower’s ability to make a down payment, pay for the closing cost, and other funds which are required at closing. The sources of the funds have to be clearly listed in the application since they all need to be verified in the file.
Credit: it refers to the amount of a borrower’s outstanding debt. It is considered in the qualifying ratios and determining the borrower’s combined loan to value ratio (CLTV). For first mortgage, LTV (Loan to Value) and CLTV will be equal. LTV determines whether mortgage insurance is required
Collateral: it refers to the value of the property mortgaged as security for the loan. The value is verified through a property appraisal by a licensed appraiser.
Character: it refers to the borrower’s willingness to repay the debt, which is different to Capability.
Closing: Closing is the signing and recording of loan documentation, plus the disbursement of loan funds. The various steps in this process are:
The Borrower pays all Closing costs (fees).
All outstanding underwriting conditions or stipulations are met.
Legal Documents are prepared and signed.
Deed of Trust (also called Mortgage) – Property is pledged as security for the loan.
Truth-In-Lending Disclosure – Document that discloses terms and costs of loan (APR, P&I).
Title / Hazard Insurance are obtained.
Loan Amount is disbursed either to the borrower or the seller of the property directly.
Post-Closing: The post-closing consists to two important parts: Document Tracking & Loan Delivery.
Document Tracking: Document Tracking is maintaining the correctness and status of Final Documents of closed loan files. This process consists of the following sub-process.
Track Status and Location of Legal Documents
Identify when documents are due, late, received, reviewed
Record Errors in Legal Documents
Record missing documents for funded loans
Take necessary action
Loan Delivery: Shipping and delivery is the packaging of closed loan files for delivery to an investor.
Warehousing: Warehousing is the financing of loans from closing of loans to sale this to an investor. Warehouse banks provide the required funds to the lenders or banks in order to complete payment to the borrowers.
Secondary Marketing: Secondary marketing is the sale of existing loans to investors, and management of the risk associated with mortgages. The secondary marketing department essentially begins the mortgage banking process by selling the mortgage loans to investors in order to raise money from them.
The normal responsibilities of the secondary marketing department include:
Selling of all mortgage loans
Managing interest rate risk
Setting rates and pricing
Managing the loan pipeline and warehouse
Managing agreements and commitments with investors
Servicing: Servicing is the collection, recordation and remittance of monthly mortgage payments to investors.
Servicing (Loan Administration) involves all administrative activities like
Collection of monthly payments of borrower towards repayment of loan
Recording payments and calculating the Unpaid Balance (UPB) after each payment
Disbursing the payment amounts to the appropriate stake-holders (e.g. investors, insurance companies, etc.)
Servicing fee towards servicing loans is the largest contributor to the income of the lender
Investor usually pays a premium to obtain “Servicing Rights” from the lender
Lenders also use Servicing to advertise other loan products and expand business.