Loan Life-cycle

The process of making a 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 loan cycle begins when a prospective borrower inquires about a residential mortgage loan, and it ends when the Borrower pays off the loan.

  1. Application
    The application process has several purposes:
  • 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
  • Assisting the applicant in selecting the appropriate loan programs
  • Informing the applicant of the details of the mortgage loan program, including a full disclosure of all costs and expenses
  • Pre-qualify applicant for ability to repay a loan
  • Explain how the Contract works and how to fill in the appropriate information.
  1.      Loan Processing
    Loan processing includes the collection and verification of detailed information on the borrower and on the transaction itself.   The Lender is primarily interested in two things:   the subject property, and the financial situation (which includes one’s credit history.)  The process gathers the information to help determine borrower’s ability and desire to repay the loan.

    • Gather, organize and verify all the information
    • Entering Information into computer from Loan Application
    • Disclosure Forms sent to Borrower
    • Verifications–Employment history, Credit history
    • Review Verification Responses
    • Ratio Analysis
    • Appraisal is performed and reviewed for accuracy and completeness.  A professional appraiser will estimate the market value of the collateral.  This information is required because the lender will loan you not more than a given percentage of the value of the asset.
    • Suitability of loan terms for which borrower has applied is reviewed
    • Customer Communication via phone calls etc.

III . Loan disbursement
If the loan is approved, the final stage in creating the loan is the funding

IV. Loan Servicing

Loan Servicing includes all activities that occur from the time a loan is disbursed 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.

  • See that loans are paid as agreed
  • Identifying and following up promptly on any delinquent payments by sending reminder notices, making telephone calls, or visiting the home of the delinquent borrower
  • 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.
  • Paying taxes and insurance: 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

Reference

Morsman, Martin. (1982). Effective Loan Management. University of Mitchigan