Obtaining a mortgage loan: Understanding the closing process
Statistics reveal that the total value of mortgage debt in the US is $18 trillion. In India, the market stands at $300 billion or 11% of the GDP. These figures are set to rise with growing purchasing power, strong demand, and low interest rates. While banks and other private mortgage businesses are scrambling for a share of this huge pie, only those that digitise the customers’ journey would make the cut. In this blog, we will answer questions such as:
- What is the meaning of lender funding?
- What are the types of mortgages?
- What are the challenges with traditional mortgage processes?
- How is digitising the mortgaging processes a solution?
What is lender funding?
The process of transferring finances to complete a real estate transaction is known as mortgage loan funding or lender funding or loan funded. Before the funds are deposited, all paperwork and financial criteria must be fulfilled. Once the process is verified and completed, the lender will release the funds to the closing agent.
Types of mortgage loans
Disbursal of loans to a customer depends on credit score, proof of income, current assets, and the size and cost of the property. Not all housing loans are the same. So, doing your homework before deciding on availing a loan will help you choose the best solution with respect to your financial position and even save you money. In addition, when you apply for a loan, you'll know what to expect in terms of guidelines. Here are the various categories of mortgage loans.
Fixed rate mortgageAs the name suggests, fixed rate mortgage maintains the same interest rate and usually extends to terms of 15–30 years. It is great if you want to plan monthly finances upfront and do not want any changes during the tenure. The rate of interest in a fixed rate mortgage is usually higher than that in an adjustable rate mortgage.
Adjustable rate mortgageUnlike fixed rate mortgages, interest rates on adjustable rate mortgages (ARMs) change with market circumstances. Many ARM products feature a fixed interest rate for a few years before switching to a variable interest rate for the remaining period. This type of mortgage may provide a lower interest rate compared with a fixed rate mortgage.
Government-insured mortgageA government-backed mortgage or Federal Housing Administration (FHA) mortgage is for those individuals with a low credit score and who can afford a lower down payment (3.5% of the total cost). This category also covers VA mortgages for military veterans and their families. VA mortgages are available at low interest rates and without a minimum down payment mandate.
Jumbo mortgageThis type of mortgage is best suited for a luxury home or estate buyer with excellent credit history. Jumbo loan rates are usually competitive, and applicants may have to pay higher down payment and show significant assets in cash or investments to avail it.
Stages of processing a loan for a mortgage
The typical journey of a loan from submission of documents to disbursement goes through four stages: loan signing, loan funding, recording, and disbursement. During loan signing, the customer provides all the required documents and the loan provider scrutinises the documents. After the process is complete, the two parties sign the agreement. The documents also require notarisation, which means producing two acceptable ID proofs and signing in the presence of a notary public.
At the loan funding stage, the bank deposits the money into an escrow account that safeguards the amount till both parties complete all the formalities. Note that loan funding does not mean that the customer gets the money. The recording stage ensures that the recorder’s office has an entry of the grant deed. At the final stage, the loan documents return to the lender for review and underwriter clearance. The bank then disburses the funds to the parties involved and closes the mortgage.
Wet closing versus dry closing
Wet closing and dry closing are industry terms that indicate how long the process takes. Wet closing means the customer gets the disbursement while the ink on the paper is still ‘wet.’ This means that the document signing, loan funding, recording, and disbursement happen at the closing table. Dry closing means that it takes multiple days for loan disbursement. In other words, the ink on the paper is ‘dry.’
Challenges with traditional mortgaging processes
Both the lender and the customer prefer a wet-ink closing, but given the traditional methods, it does not happen often. Typical processing times of a mortgage are:
3–7 business days
6–9 business days
Data shows that 1 in 4 home buyers experience delays in loan disbursement. Loan officers place unrealistic target closing dates to retain a customer. Nearly 50% of the closing delays are caused by appraisal and financing issues. Customers may have agreed on and locked an interest rate at the time of signing. Because of delays, this interest rate may expire, causing further emotional and financial fatigue for the customer.
Digitising the mortgaging process
In response to customer expectations, digitisation and faster disbursements are becoming a criteria for many firms. Online, self-service technologies that expedite loan and mortgage approvals are replacing manual paperwork procedures. While the actual money transfer may be quick in the end, if the entire process takes a while, the consumer will not see the final payment quickly.
With the advent of digital technologies, customers now have the option to digitise the whole mortgage process. This means that they no longer need to visit a bank or a mortgage company to get mortgages processed. Instead, they can apply for a loan directly from their smartphones. Digitising home loan processes benefits the borrowers in various ways, such as:
- Quick and easy processing of loan requests
- Connecting the best lender with the potential borrower
- Helping borrowers with no credit history to avail loans easily
- Optimising underwriting procedure
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How can Infosys BPM help?
Leverage artificial intelligence (AI), machine learning (ML), robotic process automation (RPA), and analytics to automate and simplify the process. Lenders can enable paperless processes for quick loan disbursement and offer cheaper rates to the borrower, thus attracting more business.
Read more about digital mortgage operations.