The Loan Cycle

The process of making a mortgage loan has five distinct steps called the loan cycle. The loan cycle is comprised of the steps taken to make and maintain a loan. The mortgage loan cycle begins when a prospective Borrower inquires about a residential mortgage loan, and it ends when the Borrower pays off the loan. Financial One will take you through the first four steps as we don't "service" the loans. Each of these functions involves many activities. The loan cycle involves five major stages:

1. Application
2. Loan Processing
3. Loan Underwriting
4. Loan Closing
5. Loan Servicing

1. Application

The application process has several purposes:

1. Obtaining the basic information from the Applicant/Borrower that the lender needs to underwrite the loan according to its standards and to reach a decision on whether to grant the loan.
2. Assisting the applicant in selecting the appropriate loan programs.
3. Informing the applicant of the details of the mortgage loan program, including a full disclosure of all costs and expenses. 
4. Pre-qualify applicant for the ability to repay a loan. Explain how a Purchase Contract works and how to fill in the appropriate information.
5. You can fill-out the Mortgage Pre-approval Form by clicking on the appropriate link at the top of the page.

2. Loan Processing

Loan processing includes the collection and verification of detailed information on the Borrower and on the real estate transaction itself. The Lender is primarily interested in two things: the subject property, and your financial situation (which includes your credit history.) The process gathers the information to help determine your ability and your desire to repay the loan.

1. Gather, organize and verify all the information the underwriter will need in order to underwrite the loan. This includes:
   1. Entering Information into computer from Loan Application
   2. Deposits (i.e. credit report fee, appraisal fee)
   3. Disclosure Forms sent to Borrower - see "Items to be Returned" list
   4. Verifications--Employment history, Credit history (the credit bureau will show how you have handled past debt and credit accounts. You may have to provide a written explanation of any problems that appear on your credit report., Assets
   5. Review Verification Responses
   6. Ratio Analysis
   7. Appraisal is performed and reviewed for accuracy and completeness (a service for which you may be charged). A professional appraiser will estimate the market value of the house. This information is required because the lender will loan you not more than a given percentage of the value of the property (LTV).
   8. Suitability of loan terms for which Borrower has applied is reviewed
   9. Pre-Underwriting
   10. Customer Communication via the Loan Tracker and or phone calls.
2. Submission to Underwriter
   1. Copying and Stacking
   2. Proofing
   3. Delivery/Courier
   4. Loan Locks

3. Loan Underwriting

The mortgage loan file next enters the underwriting stage. Loan underwriting is a process that determines whether the loan is a good risk for the lender.

1. The main task during the underwriting stage is to avoid as many undue risks as possible.
2. The loan application is evaluated in terms of the guidelines.
   1. Borrower Review
   2. Property Review
   3. Conditions
   4. Follow-up
   5. Re-review of Conditions
3. Deciding whether to grant a Borrower’s request for a loan is perhaps the most difficult stage of making a loan.
   1. Approval
   2. Commitment Letter

4. Loan Closing

If the loan is approved, the final stage in creating the mortgage loan is the funding and loan closing. In loan closing, the final details of the loan transaction are completed and the loan funds are disbursed. Most frequently, closing is handled by a title company or closing attorney.

1. Loan closer obtains a title company/attorney’s opinion as the condition of the title to the property--its ownership. This opinion of title is reviewed very carefully to verify that the seller owns the property and that there are no unknown claims outstanding against it. Also, the Borrower must provide adequate hazard (and in some cases flood) insurance for the property.
2. Next the loan closer prepares the loan’s legal documents and makes certain other legal requirements are met, such as up-to-date payments of real estate taxes. The mortgage loan file and legal documents are double-checked for completeness and accuracy. Some federally mandated disclosures are usually provided to the Borrower.
3. Finally, the loan amount must be properly disbursed so the Borrower will be liable for repayment. The appropriate parties must receive the correct amounts in order for the legal conditions for the best to be met.
4. The mortgage is recorded on the public record, and the lender makes a final review of the loan file for quality control purposes
5. At this point, the closing of the loan is complete.
6. Post-Funding Audit

5. Loan Servicing

Loan Servicing includes all activities that occur from the time a loan is closed until the time it is repaid. Servicing activities help ensure that the loan is repaid in a timely manner and that the lenders’ legal claim to repayment of the funds is maintained.

1. See that loans are paid as agreed.
2. Identify and follow up promptly on any delinquent payments by sending reminder notices, making telephone calls, or visiting the home of the delinquent Borrower.
3. If efforts fail, foreclosure is the legal action that bars a defaulted Borrower’s right to reclaim the mortgaged property. This action is taken to satisfy the outstanding balance on the mortgage; usually results in property being sold at public or private sale.
4. Pay taxes and insurance on the property. Servicer wants to make sure that these taxes are paid because government tax claims can take precedence over the lender’s claim on a property. Additionally, if the property is destroyed or damaged by fire, wind, etc. without insurance the loan is no longer adequately protected.
5. When a Servicing company services loans for lenders, it collects a fee ranging from 0.25 to 0.50 percent. For example, when a loan is closed at an eight percent interest rate, the Servicer passes through principal and interest of approximately 7 5/8 percent to the Bank, Insurance Co., etc. The Servicer keeps the difference as a servicing fee.
6. Advise Borrowers of changes in rate for ARMs
7. Transfer the loan to a new owner or Servicer
8. Payment Processing
9. Calculate loan pay-off amounts, and handle the processing of loan pay-offs.
10. Recordings

Useful Mortgage Lender links