The mortgage application process requires
considerable paperwork. First there is the application form, which
asks for detailed information about you, your employment record, the
house you want to purchase, etc. The lender will need documentation
pertaining to your personal finances--your earnings, your monthly
expenses, and your debts--to help gauge your willingness and ability
to repay the mortgage.
Lenders also will examine your file
at the credit bureau to learn if you pay your bills on time. A lender
may reject your application if the report shows that you have a poor
credit history. Thus, you may want to make sure your credit file is
accurate before you apply for your
mortgage. You have a right to know what information is contained in
your credit report and to have someone from
the credit bureau help you understand what the report says. The names
of credit bureaus can be found in the phone book.
To figure the mortgage payment, the
lender will begin by asking how much you want to borrow. The maximum
loan amount will be determined by the value of the property and your
personal financial condition. To estimate the value of the property,
the lender will ask a real estate appraiser to give an opinion about
its value. The appraiser’s
opinion can be an important factor in determining whether you qualify
for the size of mortgage you want. Lenders usually will lend the borrower
up to a certain percentage of the appraised value of the property,
such as 80 or 90 percent, and will expect a down payment making up
the difference. There are also special 100 percent programs available.
Contact Allie Mae for help. If the appraisal
is below the asking price of the home, the down payment you planned
to make and the amount the lender is willing to lend you may not be
enough to cover the purchase price. In that case, the lender may suggest
a larger down payment to make up the difference between the price
of the house and its appraised value.
When looking at your projected mortgage
payment and existing debt, some lenders might use ratios such as "28
and 36" to determine whether you qualify for the loan. These
are commonly used ratios.
In the case of "28 and 36,"
the 28 refers to the percentage of your gross income (before taxes)
that may be spent on housing expenses, including principal and interest
on the mortgage, real estate taxes, and insurance. The 36 refers to
the income that may be spent for payments on all your debts (including
the mortgage): the monthly payments on your outstanding debts, when
added to the monthly housing expenses, may not exceed 36 percent of
your gross income. When you talk to a lender, find out what ratios
will be used to evaluate your application.
Then use Worksheet 2 to calculate whether you are within the lender's
guidelines.
Be prepared to provide certain documentation
about your income (W2s for prior years and year-to-date pay stubs),
current debts (account number, outstanding balance, and creditor’s
address for each), and the purchase contract for the home you want
to buy. When you file your application,
ask the lender how long the approval process will take. The time may
vary depending on the complexity of your mortgage, current market
conditions, and whether you have to provide additional information.
It’s common for a decision to be made within 30 days after the
lender receives all the necessary information. Applications for FHA
or VA loans may take longer.
If your application
is turned down, federal law requires the lender to tell you, in writing,
the specific reasons for the denial. Make sure you understand the
reasons given--you may be able to find answers or alternatives that
will satisfy the institution’s lending standards. Even if that
doesn’t happen, understanding fully why the loan was denied may
improve your chances with the next lender you visit. Factors that
may affect the loan decision include:
Down payment
Is your proposed down payment sufficient?
If not, perhaps the lender offers other types of mortgages with lower
down-payment requirements.
Appraisal
Is the size of the mortgage you need
too high, given the property’s appraised value? If similar houses
in the neighborhood have sold at prices comparable to yours, maybe
the appraiser undervalued the property. Suggest that the lender re-examine
the appraisal. You also have the right to receive a copy of the appraisal
if you have paid for it.
Credit history
Is the lender doubtful--because of your
level of debt or credit history--about your ability to make the monthly
payment? Ask how your debt ratios compare to the lender’s standards.
If there were special circumstances surrounding old credit problems,
ask for a chance to explain.
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