Applying for your Mortgage
This section discusses the steps
that a lender follows to process your completed application, what
the lender will look for when making a loan decision, and what to do
if your loan application is denied. This information was adapted
from the Fannie Mae web site. Please click here to go directly to
Fannie Mae for additional information.
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The Process of
Home Mortgage Loans
Adapted from Fannie Mae's Web Site
Steps Your Lender
In processing your loan, the
lender will be primarily interested in two things:
the property that you plan to
buy (because it serves as collateral for the loan); and
your financial situation and
your credit history (because they will determine your ability and
your willingness to repay the loan).
The lender will request an
appraisal of the property, require a credit report of you and any
co-borrowers, and verify the information in your loan application.
Let's look at each of these steps in turn.
The lender will arrange to have a
professional appraiser estimate the market value of the house you
plan to buy. The lender is interested in the value of the property
because it serves as collateral for the loan. The lender wants to
make sure that the value of your home would support the amount of
your mortgage. The appraiser looks at what the home is worth today
and how the neighborhood may affect future property value. The
appraiser evaluates the property’s age,
recent sales of neighborhood or
similar homes within a given radius, structural soundness,
and other physical characteristics, as well as location factors such
as surrounding homes, access to transportation, and even how zoning
and taxes may affect the property in the future. Your lender will
not loan you more than a given percentage of the value of the
property (called the “loan-to-value ratio”). Once completed, the
appraiser will send appraisal forms directly to your lender.
Your lender orders a credit report
on you and your co-borrower to verify information you’ve already
supplied on your application and to see how you’ve handled past debt
and credit accounts. A credit report supplied by a credit reporting
agency can tell the lender how much you owe, how often you borrow,
and whether you pay your bills on time. All of these things can help
the lender understand how well you might repay a mortgage loan.
Your lender may ask you for a
written explanation of any problems that appear on your credit
report. Even one late payment on just one account may require an
explanation from you. Just respond promptly with a truthful
statement about whatever may have caused the late payment. In fact,
if you know you have a credit problem, it may be to your advantage
to talk to a loan officer about it at the time of your loan
interview -- rather than wait until a credit report prompts your
lender to ask you about the issue.
Employment and Assets
Your lender will verify
information about your jobs and your savings and checking accounts.
Usually, the lender sends forms to your employers asking about your
job history and current salary and to your banks asking about your
assets (checking and savings accounts, etc.).
If you currently rent, your lender
will send a Rental Verification Form to your past landlords to
inquire about your rent payment history. If you currently have a
mortgage, the lender will send your current mortgage lender a
Request for Mortgage History Rating. That rating will provide your
lender with information on how you handled mortgage payments in the
Usually, the amount of your loan
can be no more than 95 percent (some
programs allow 97% up to 100% financing to qualified buyers)
of the appraised property value or 95 percent of the sales price of
your home, whichever is less. So if the appraised value is less than
the purchase price you have agreed on, the amount of your mortgage
may be smaller than you anticipated, and you will have to come up
with a larger down payment or renegotiate with the seller the amount
of money you will pay for the home.
Obtain title opinion or search
An attorney or title company
performs this service. The purpose is to determine what, if any,
liens, encumbrances, property tax situation, ownership of record,
etc. are filed on the subject property or any other property that
may be considered as collateral against the loan.
of a Mortgage Insurer
If your down payment is less than
20 percent of the purchase price of your home, your loan generally
will require mortgage insurance. If mortgage insurance is a
requirement, the loan will also have to meet the underwriting
standards of the mortgage insurer. If you are obtaining an Federal
Housing Administration (FHA), Department of Veterans Affairs (VA),
or Rural Housing Service (RHS) loan, the loan must also meet those
Tips to Speed
Up the Approval Process
To ensure that your mortgage
application may be processed as quickly as possible, it’s important
to bring all the proper information to your loan application
interview. It is vital to provide current, accurate information
during the interview. If your lender checks your credit history,
your employment or your current bank account balances and finds
discrepancies with your application, major delays may result, and
more information may be needed.
Fill out the application
completely. Missing information creates delays in the evaluation and
processing of the application. Be careful to include all debts. The
investor may require a written explanation from the customer for
debts omitted from the application and could create delays as well.
A copy of a divorce decree (if applicable) may be required to
explain why certain debts are on your credit report. This may also
be helpful if trying to omit them from your debt ratio.
Be up front with any past credit
problems. Your explanation of why loan payments were late or how a
bankruptcy was handled will help your lender in fairly assessing
your loan application. Your honesty and cooperation in providing
required documents promptly will make the application process run
During the loan review process,
your lender may ask you to sign and return additional documents such
as a notarized gift letter (if you are receiving gift money toward a
down payment). Be sure to get these documents to your lender
How the Lender
Views Your Application
Your mortgage loan file is
designed to provide information the lender needs to evaluate the
risk involved in lending you money -- the likelihood that you will
or will not repay the loan. Lenders look at the “three C’s” of
Credit -- capacity, credit history, and collateral.
Lenders follow industry guidelines
that specify how much of a mortgage you can qualify for. In general,
the standard guideline lenders use is that your monthly mortgage
payments (including mortgage, principal, interest, taxes, and
insurance generally) should be no more than 28 percent of your gross
monthly income and that your monthly debts (including your mortgage
payment usually) should not be more than 36 percent of your gross
monthly income. These guidelines are flexible and may be increased
somewhat, depending on your situation and the type of loan program
you apply for.
Can you repay the debt? Lenders
ask for a minimum of two years
of employment information: your occupation, how long you have
worked, and how much you earn. They also want to know your expenses:
how many dependents you have, whether you pay alimony or child
support, and the amount of your other obligations
including loans you may have co-signed
or guaranteed for others..
Will you repay the debt? Lenders
look at your credit history: how much you owe, how often you borrow,
whether you pay your bills on time, and whether you live within your
Do you have enough cash for the
down payment and for closing costs? Do you need a gift from a
relative? Will you have a cushion left after your home purchase, or
will you spend your last penny at closing?
Will the lender be fully protected
if you fail to repay the loan? Lenders must be sure the value of the
property you are buying is sufficient to back up your loan.
Loan is Denied
Lenders are required to explain in
writing their decision to deny credit and have 30 days from the
submission of your completed application to tell you if and why your
loan is not approved. Completed application includes your written
application and all necessary requested information.
Your Loan Was Not Approved
Perhaps your loan application was
rejected on the basis of a credit bureau report. Or perhaps the
lender's qualifying formula shows that you have insufficient income
or too much debt to afford the house you are proposing to buy.
In either of these cases, there
are steps you can take. For instance, if you are refused credit
because of a poor credit rating, you are entitled to a free copy of
the report from the credit reporting agency. You can then challenge
any errors and can also insist that the credit reporting agency
include your side of any unresolved credit disputes in its reports.
If your credit history is not adequate, you should start repaying
debts to get current. Once you have improved your credit profile,
you may be in a position to begin house hunting and apply for a
mortgage loan again.
Many lenders have a second level
of review for denied loans, and you may wish to ask about this.