Mortgage Loan Processing Overview

Mortgage Loan Processing

• Mortgage loan processing is the initial step to qualify for a loan.
• Processing involves gathering and verifying information, and conducting preliminary evaluations.
• There may be corrections and re-disclosures as information changes.
• Mortgage loan officers (MLOs) need to understand processing steps to inform applicants.
• Processing may involve one or more specialists, or may be handled by the MLO.

Documentation and Verification

Appraisals

• Appraisal is a licensed or certified professional's estimate of property value.
• Appraisal examines recent sales, property inspection, and judgment.
• Appraisal is generally ordered soon after a borrower decides to proceed with the loan.
• Some purchases and refinances may not require an appraisal (e.g., if value can be corroborated by an automated valuation model or through other existing appraisals).
• Refinances that are "streamlined" do not usually require a new appraisal.
  • Conditions for a "streamline refinance":
    • No cash-out is involved.
    • The refinance lowers the interest rate, payment, and/or term. -The loan is sold to the same secondary market investor or insured by the same agency.
• Lenders may accept updates or recertifications from the same appraiser rather than a new appraisal if the property was recently appraised.
• Lenders must protect the appraiser's independence to ensure objective valuations.
• Prohibited activities include influencing an appraiser's value, threatening a payment, or implying future assignments depend on a valuation.
• Lenders must maintain separation between sales/mortgage production and appraisal functions.
• This gap is often filled by Appraisal Management Companies (AMCs).
• AMCs act as intermediaries.
• AMCs oversee recruiting, selecting, and retaining appraisers.
• Lenders may interact with appraisers for clarifications or additional information.

Appraisal Approaches

• The Market Approach (Sales Comparison Approach) compares the property to recent comparable sales and adjusts for differences.
• Adjustments depend on appraiser's judgment and knowledge of local market conditions.
• The Income Approach estimates value based on rental income and is less common for single-family homes.
• The Cost approach estimates value by the cost of building a similar structure, minus depreciation, and is less common for single-family homes.
• Appraisal fees are typically covered by the buyer for home purchases and by the homeowner for refinancing.
• Lenders must provide the appraisal to the applicant promptly, or three business days before closing, whichever is earlier.

Verifying Borrower Qualifications

• Lenders must verify a borrower's ability to repay a mortgage.
• Documentation is gathered during the initial application or during processing depending on what was done at the initial application. 
• Current employment is usually verified via the borrower's pay stubs and confirmation.
• Verification of employment is done through a lender's official VOE form sent to the employer.
• VOE forms cannot be hand-carried by the borrower or others.
• Additional documentation includes income tax returns (after borrower authorization to IRS about tax transcript release), profit and loss statements, balance sheets, retirement statements, etc.
• Income from alimony or child support needs verification of reliability and consistency.
• Non-salary income (tips, commissions, self-employment) needs past two years’ documentation (e.g., income tax returns, and financial statements).
• Retirement, disability, and Social Security income verification from appropriate sources.
• Assets are verified by borrower-provided documentation, or through financial institutions holding the assets.
• Bank statements (recent months) and investment account statements are generally required, checking for notable deposits and showing vested account balances.
• Verification of non-cash assets is done when those assets are used for a down payment, often with title transfers or bill of sale confirmations.
• Verification of Deposit (VOD) forms are sent to financial institutions who hold assets for verification purposes.
• VOD/VOE forms are sent directly to the verifier and not by the borrower.
• Lenders require borrower authorization to obtain information from third parties as part of the application process.

Automated Underwriting System (AUS)

• AUS findings outline accepted verification types for employment, income, and assets.