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 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.
Steps Your
Lender Follows
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.
Obtain a
Property Appraisal
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, 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.
Obtain
Your Credit Report
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.
Verify
Your 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.).
Verify
Your Housing Payments
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
past.
Establish
Loan-to-Value Ratio
Usually, the
amount of your loan can be no more than 95 percent 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
Approval 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 standards.
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 or your employment or your current bank account balances and
finds discrepancies with your application, major delays may result,
and more information may be needed.
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 smoothly.
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
loan processor promptly.
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 “four
C’s” of Credit -- capacity, credit history, capital, 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) should be no more than 28 percent of
your gross monthly income and that your monthly debts (including your
mortgage payment) 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.
Capacity
Can you repay
the debt? Lenders ask for 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.
Credit
History
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 means.
Capital
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?
Collateral
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.
If Your
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.
Understand
Why 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.
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