The Application Process: What's the Lender Doing with All My Information?
Before you receive a loan, the lender will require that an application be completed. Basically the application is an account of who you are, where you live, where you work, what you earn, what you own and what you owe. A mortgage is very likely the largest loan you may ever receive, and terms will span decades. It shouldn't be a surprise that the mortgage application process is far more in-depth.
What information does the lender need?
In addition to the basic loan application questions, the mortgage lender will likely require additional documentation in the form of payroll records and W-2 forms. Statements for savings and checking accounts as well as investments and retirement funds are used to document your ability to pay your down payment and closing costs.
The lender will verify the information contained in the application, check credit references and evaluate the property that will collateralize the loan. They'll also determine if the payments are within your means. It would be a disservice to a borrower for a lender to grant a loan that the borrower cannot afford. If everything checks out within the lender's underwriting guidelines, the loan is approved. If not, the lender may request additional information from the borrower, offer alternate terms for the loan, or may deny the request.
Do I need perfect credit references?
Not necessarily, but the better your credit history is the more likely that your loan will be approved. Most lenders will ask for a written explanation of any derogatory items or recent inquiries. Remember, to your lender, your credit history is a pretty good indicator whether you'll make timely payments on your mortgage loan. Some lenders will offer alternate terms for borrowers with bad credit history. Such terms might require a higher down payment, a higher interest rate or a cosigner to guarantee the loan.
How is the property evaluated?
Most lenders will have the property appraised. An appraisal is the determination of the market value of a property. The lender wants to know what the property is worth and that it can be sold if necessary in a foreclosure. Most lenders use independent certified appraisers. You can reserve your right to see the appraisal by signing a special section of the standard mortgage application.
How does the lender know what I can afford?
Most lenders will calculate the affordability of a house payment in two ways. First, by finding the relationship between the total house payment and your gross monthly income. Second, by looking at the relationship between all your debts (including the house payment) and your gross monthly income. The more income that is committed to servicing debt, the harder it is for borrowers to make payments.
How long does all this take?
The length of time involved from application to approval will vary. You should expect any lender to be able to give you an idea ahead of time how long the processing will take. The better you understand what the lender's process involves, the better position you are in to secure financing for your home loan.
How will I know if I'm approved?
The lender will provide an approval letter as written commitment to fund your loan. It will state any conditions for the approval. It is important that you meet all the conditions as stated. Read all correspondence from your lender relating to your loan. And if you have questions, ASK.