With the recent drop in interest rates there has been a huge spike in refinances, which allow borrowers to shop for better mortgage rates and terms. While a refinance can be a great way for borrowers to save money, it’s not always wise to pursue if they have a poor credit rating. Here’s what your borrowers need to know about the steps in a refinance transaction.
Prequalifying
Prequalification allows a borrower to shop around for rate quotes from various lenders. You can collect information to get a better understanding of the financial options available, and once you find the lender that suits your needs, you can begin the prequalification or preapproval process.
Application
When you decide on a lender, you can begin the application process. The lender will then send a loan estimate within three business days.
Proof will be required for your income, assets, and funds for closing. The lender will run a credit report, and your mortgage originator will help create your preferred mortgage program. In some cases, your information will be sent through an automated underwriting system as well.
Initial Disclosures & Processing
Your mortgage documents are prepared for your review, including your intent to proceed and loan estimate. Once you have thoroughly reviewed the papers, you can complete them, sign them, and send them back to the lender.
The loan processor and mortgage originator will prepare your transaction for underwriting. At this time, your title insurance and escrow are ordered if you’re buying a home. Everything is reviewed by the processor to see if any further information, documentation, or updates are required.
Locking In
You can choose to lock into your rate based on your risk tolerance and goals. You can also choose to float your mortgage interest rate. However, before an underwriter can issue final loan approval, your mortgage rate must be locked in.
After this, there could be other documents such as a revised loan estimate that will be signed and returned to the mortgage company.
Homeowner’s Insurance
The lender will need the contact information for the company handling your homeowner’s insurance. Your insurance company will have to provide a binder as soon as possible.
The Appraisal
The appraisal is ordered after preliminary loan approval and supporting documents are complete. The appraisal is reviewed by the underwriters and then sent to you. If it is less than expected, you will only be provided a loan for the appraised value. This might require revised documentation. If the appraisal is higher, you could see improvements to your pricing or terms.
Underwriting Approval
Once everything is complete, the underwriters will review the application, supporting documentation, and lender guidelines. They can issue a conditional approval or even deny or suspend the file. Some conditions have to be resolved before you’re “clear to close.”
After the initial underwriting conditional approval, there are two types of underwriting conditions:
Re-submission of Conditions
The processor or mortgage originator will provide you with a list of additional items requested. The file is then sent back with the additional documents for final review and approval.
Payoffs
If you intend to pay off a second mortgage or HELOC/Home Equity Line of Credit, the escrow company will request a payoff. If not, the lender will request that the second mortgage/HELOC be subordinated. The second lien holder/HELOC must approve the refinance and allow their lien to be re-subordinated before refinancing can be completed.
Final Approval and Closing Disclosure
With final approval, a closing disclosure is prepared for you. This document replaces the HUD-1 Settlement Statement. You should sign the papers right away, as any delays on your part can cause further delay for closing.
Documents and Signing
Once the closing disclosure is received from all borrowers, the lender prepares the loan documents and delivers them to the escrow company. They will then schedule an appointment to sign. There is another three-day wait for the right of rescission before the loan can close.
The escrow company will send the signed documents to the lender for review. If there is a purchase, the documents are recorded with the property’s county.
Re-verification
The lender will verify your employment and do a final review of your credit report. If there are changes, the transaction can be delayed, and the changes will be reported to the underwriter. If all is well, the lender will contact the escrow company to “balance” funds, which can then finally be wired to escrow with instructions for recording at your county.
Finally, you are officially closed, and the escrow company will wire the funds or send you a check.
What about the steps in a refinance transaction for mortgage and title professionals?
If you are a national mortgage or title professional and want to see the exact laws and procedures regarding refinancing transactions in each of the 51 jurisdictions of the United States, purchase The Ultimate Real Estate Transaction Compliance Manual from System 2 Thinking.
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