The Mortgage Application Process
The mortgage application process can seem overwhelming, requiring endless paperwork. Let's take a look at what you actually need to do.
First there is the mortgage application form, which asks for detailed information about you, your employment record, the house you want to purchase, etc. The lender will need documentation of your personal finances - what you earn, your monthly expenses, and your existing debts - to judge your ability to repay the mortgage.
Lenders also will examine your credit
report from one or more of the major the credit bureaus to learn if you pay your bills
on time. A bank may reject your application if the report shows that you have a poor credit history. The credit bureaus are
are notorious for reporting incomplete, outdated and incorrect information. You should check to make sure your report is
accurate before you apply for your loan. You have the right to know what information is in your credit report and
to have someone from the credit bureau help you understand what the report says.
CreditReporting.com
can
provide copies of your credit report from each of the major credit
bureaus. If your credit report shows negative items, the Lexington Law Firm
may be able help
repair your credit.
You can prepare for the bank's questions about your financial condition with our mortgage worksheet. This will help you figure out how much money you can spend on a monthly payment. In part 1 of the worksheet, just list all of your income and any payments you're already making on debts that you won't pay off within the next ten months. Enter the quote from your bank for the monthly housing expense. If you haven't gotten a quote from a bank yet, we have a list of mortgage companies that will give you a free quote online.
Your mortgage payment will depend upon how much money you borrow. How much you can borrow depends upon the value of the property and your financial condition. The bank will require a professional real estate appraiser to appraise the property. Banks will usually loan you something like 80% to 90% of a property's appraised value, with your down payment making up the difference. The appraiser's opinion is very important. If the appraisal is below the asking price of the property, the bank may not be willing to loan you enough to cover the cost. Sometimes you can increase your down payment to cover the difference, sometimes you can get the seller to reduce the asking price.
You can estimate how large a mortgage the bank will be willing to loan you with some quick calculations. Remember, every bank has its own formula to determine exactly how much to loan a particular borrower, and these are only estimates. There are two common numbers banks use to calculate how large a mortgage you qualify for. You can calculate them in part 2 of the mortgage worksheet.
The first number is called the housing expense ratio. This is calculated by dividing your monthly mortgage payment by your gross (before tax) monthly income. Remember your monthly mortgage payment includes the principal, the interest, your real estate taxes and your homeowner's insurance. Many lenders will give you a loan if your housing expense ratio is 28% or less - that is, you're spending 28% of your monthly income on your house.
The second number is called your debt payments ratio. This compares the total amount of your debt payments against your gross income. To calculate your debt payments ratio, add your total monthly debt payments (excluding utilities) and your expected total monthly mortgage payment then divide that by your gross monthly income. Many banks want you to have a debts payment ratio of 36% or less - that is the total of your bills is 36% of your monthly income. When you apply for your mortgage, be sure to ask the lender what numbers they use for the housing expense and debt payments ratios.
The bank will require you to document your income. Most will require your IRS form W2 for several of the prior years and pay stubs from this year. They'll also want a list of all of your current debts (excluding utilities). Be prepared to provide the account number, current balance and address for each creditor. It may be easier to get a copy of your credit report from CreditReporting.com than to track down all the account numbers and addresses.
When you apply, ask the bank how long they take to approve a mortgage. How long it takes varies by the bank, how complex your situation is, how many applications the bank is already working on. Expect that you didn't get all of the information you need on the first try and the bank will call asking you for something. Unless there is an unusual situation, most banks can approve a mortgage within 30 days - often much quicker. Applications for VA and FHA loans usually 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 bank’s requirements. 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 bank's 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 of your ability to repay the loan because of poor credit? You may be able to explain old credit problems if they were caused by special circumstances. Companies like AcademyLaw.comcan work with you to try to repair problems in your credit history.
Be sure to take your time to read through the loan agreement and make sure you understand all of its provisions. You should have a good lawyer help your with your purchase, having her review the loan documents may be well worth the cost.
If you haven't applied for your mortgage yet, here's a list of lenders that let you apply online - free.