First-Time Buyers

The Loan Process: What You've Never Been Told About Getting a Mortgage

August 25, 2024• 8 min read

About 75% of homes in America are purchased through bank loans, and the mortgage process is a subject broad enough to fill an entire book. This post focuses specifically on residential loans and covers the details that most people never hear about — details that can make you the strongest buyer in any offer situation.

Why Pre-Approval Matters

As you may already know, no seller will take your offer seriously without a pre-approval letter from a bank. Every seller — and the agent representing them — wants assurance that an offer can actually be completed. That said, having a pre-approval letter is not a 100% guarantee that a loan will be issued. Several things can change after you receive it: you might lose your job, take on a new car loan, accumulate thousands of dollars in additional debt, or be affected by rising interest rates that reduce your purchasing power.

This is why it's important to start preparing at least one year before you plan to buy. During that time, a loan officer can review your financial situation and guide you toward the profile banks want to see. Many people avoid meeting with lenders out of concern that it will hurt their credit score — but losing 1–2 points in the short term has no meaningful long-term impact and is not worth worrying about.

The Three Levels of Pre-Approval

During the pre-approval process, there are two main stages:

1. DU — Desk Underwritten Approval All your documents are reviewed by an automated system and checked against Fannie Mae or Freddie Mac guidelines. This determines how much you're eligible to borrow and allows you to begin your home search.

2. UW — Full Underwritten Approval (Pre-Underwritten Loan) Here, a licensed underwriter manually reviews each of your documents and essentially confirms your loan before you've found a home. This is called a pre-underwritten or fully approved loan. With this letter, you can walk into any home and make an offer with maximum credibility.

To put it in perspective: about 5% of buyers search with only a pre-qualification letter. About 95% use a standard pre-approval letter — which is perfectly normal. Only about 5% go through the full pre-underwriting process. If your lender isn't willing to do it, that's fine — but if they are, it can significantly speed up and strengthen your home purchase.

Shop Multiple Lenders

When taking out a loan, it's essential to work with several banks or loan officers. Each lender has different lending criteria and capabilities. One bank might offer you a $500,000 limit while another qualifies you for $600,000. One might accept a DTI (debt-to-income ratio) of 43%, while another allows up to 50%. One might offer 7.3% while another comes in at 6.9%.

Online banks have grown rapidly and can sometimes offer the best rates — but they come with a significant downside: the absence of human relationships. When you work with a local loan officer or your own bank's representative, you get personalized attention, local market insight, and the ability to resolve problems after business hours if needed. With online lenders, any issue typically has to wait until the next business day.

When shopping around, always compare lenders on the same day. Interest rates can change twice in a single day, so comparing quotes from different days won't give you an accurate picture. Also, make sure you're comparing the same loan product — FHA, Conventional, and other loan types each have different terms and shouldn't be mixed.

When calling lenders, ask two key questions:

What is your interest rate today?
Is that your zero-point rate? If not, what is your zero-point rate?

Understanding Points

One point equals 1% of the loan amount. If you're buying a $500,000 home with a 20% down payment, one point equals $4,000 (1% of the $400,000 loan).

If banks are currently offering 7%, you can ask what it would cost in points to get a rate of 6.5%. The exact savings per point depends on the specific lender, the loan type, and overall market conditions — sometimes the discount is meaningful, other times less so. There's also a limit to how many points you can buy down.

Knowing this, you can also negotiate with the seller to contribute toward a rate buydown as part of the purchase agreement. In the current market, this is difficult — it's still a seller's market overall — but it's worth discussing with your agent before submitting an offer.

If you plan to refinance or sell within 7–10 years, paying extra points for a lower rate generally doesn't make financial sense, especially since rates are expected to decline over the next few years.

You can also take negative points — in which case the lender pays you money in exchange for accepting a higher interest rate. This makes sense if you plan to sell or refinance within one or two years. There's no single right answer; every situation requires its own analysis. Negative points can be used to reduce your down payment or cover other expenses.

Lock Your Rate

Once you've chosen a lender and settled on a rate, the next critical step is locking your rate — committing to a specific interest rate for a set period.

This is always important, but especially in a volatile market. When you lock, the lender freezes your rate for 30–45 days while you continue your home search. Even if rates rise during that window, you keep the locked rate.

In a recent transaction, our buyer initially received 6.9% but chose not to lock. By the time of closing, the rate had risen to 7.12% — a costly decision.

That said, locking has a downside: if rates drop after you lock, you may miss out on savings. Many lenders offer a one-time float-down option, allowing you to take advantage of lower rates if the market moves in your favor. Alternatively, if rates drop significantly, negative points (lender credit) could put money back in your pocket.

Locking your rate does not obligate you to stay with that lender. If circumstances change significantly, you always have the option to walk away — but be aware of any costs involved. When you lock, always get written confirmation from your lender.

Fixed vs. Adjustable Rate

When taking out a loan, one of the most important decisions is choosing between a fixed rate and an adjustable rate (ARM).

Adjustable-rate loans often start with lower rates, but those rates are only fixed for the first 3, 5, or 7 years. After that, the rate adjusts periodically, which can significantly increase your costs over time. For this reason, a 30-year fixed-rate mortgage is generally considered the most stable and predictable option.

PMI: Stop Fearing It

If your down payment is less than 20%, you'll be required to pay PMI — Primary Mortgage Insurance. This typically runs about 0.5% of the total loan per year, broken into monthly payments. On a $400,000 loan, that's roughly $2,000 per year.

Many people use PMI as a reason to delay buying a home for years, assuming they'll be stuck paying it for the life of the loan. That's not how it works. Once your monthly principal payments reduce your loan balance to 80% of the original amount, PMI automatically drops off. You continue paying only PITI — principal, interest, taxes, and insurance.

The real opportunity is this: if you make extra principal-only payments each month, you can eliminate PMI much faster and save dramatically on total interest paid.

Here's an example: You buy a $500,000 home with 5% down ($25,000). To cancel PMI, you need to pay down an additional $75,000. At standard payments, this takes about 133 months. By adding an extra $500/month toward principal, you get there in 69 months — and in the process, you save approximately $264,000 in interest. You also reduce your loan term from 30 years to roughly 20 years. That's equivalent to earning an extra $26,400 per year over the following 10 years.

PMI isn't something to fear — it's something to understand and use to your advantage.