 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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