The secret life of your mortgage application
Meeting with a loan officer and completing paperwork are just the beginning. What happens once everything has been submitted? Here's a look at 5 steps your application takes as it marches toward a decision from your lender, and what to do if your application is rejected.
Applying for a mortgage loan can leave even the savviest consumers scratching their heads in confusion.
To lift the veil of mystery around the mortgage-approval process, we peeked behind the scenes at an application's five-step journey with a lender. We also learned three tips for helping to speed your application toward approval and five ways to improve an application if your loan is rejected.
Step 1: Talk with a loan officer.
Your first and probably only contact with your lender is your loan officer, the salesperson who takes your application. When you first meet, the questions on your mind are likely to be, "Do I qualify for a loan?" and "How much can I borrow?" The loan officer is probably wondering, "Am I going to be able to sell a loan?" It's a courtship.
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This first meeting is a simple, no-commitment step, conducted in an office or on the phone, or you may fill out a form online. You reveal a few basics — your name, your income, your debts and your estimated credit score. Your lender looks up your "tri-merge" credit score, which includes scores from the three biggest credit-reporting agencies.
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You're itching to get a "thumbs up" or "thumbs down." Do you qualify or don't you? But the loan officer has only your word to go on at this point, so don't expect to get an ironclad approval. Not yet. The answers you'll get at this stage will be versions of, "It depends."
The loan officer might say, "If what you've told me about your income, credit score and debts all checks out, yes, you'll qualify for a loan. Let's submit the application and find out." Or you might hear, "It looks like you'll qualify, but for less money than you're hoping for." Or, "You're probably not eligible right now, but your chances would improve if you save up a larger down payment or pay off your car loan."
At this stage you can be "preapproved" and get an estimate — not a promise — of how much you can borrow.
If you're refinancing, your application is ready for the next stage of the process. If you're buying, you may not be able to get a good faith estimate (GFE) and a preapproval without choosing a home to buy, because the home, too, must pass muster. The bank needs to know what it's worth and what shape it's in. After all, if you default, the bank will become the owner.
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Still, it's a good idea to apply before house hunting, with one or several lenders. That way, the process can move quickly when you find a home.
Savvy borrower tip No. 1: Look for a lender who takes your application seriously enough at the preapproval stage to run your application through Desktop Underwriter or Loan Prospector, software programs used to qualify borrowers, says Bryan Wiley, loan officer at Guild Mortgage Co.'s office in Bellevue, Wash. This will speed up the approval process by providing an early warning of problems your application might face.
Step 2: Fill out your application.
Here's where your real work begins. You answer the questions in the borrower information sections (Sections III, IV, V and VI) of the Uniform Residential Loan Application. (All lenders use the same form. It's here, at FannieMae.com.) It asks your name, address and Social Security number, housing and employment history, income and housing expenses, assets and debts. Your loan officer can help you with some questions, but you'll need to take it home to add up your monthly expenses and find documents such as old W2 forms, tax records, 401(k) and IRA documents, bank statements and addresses of old employers.
Whether refinancing or purchasing, you'll need to hire an appraiser at this point to get an expert valuation of what the home is worth.
Savvy borrower tip No. 2: With home values uncertain these days, your best chance for an accurate appraisal is with a local appraiser who knows your neighborhood. Avoid lenders who use out-of-town appraisers. Don't know? Just ask.
Step 3: Submit your application.
When you hand your application to a loan officer, the clock starts ticking. Within three days, the lender must give you a packet of "disclosures" including:
- A good faith estimate (Here's the GFE, a PDF file), describing the loan, costs and terms offered.
- A truth-in-lending form, disclosing the loan's annual percentage rate, the number to use in comparing competing loan offers.
The lender's offer is conditional. The information on your application has to check out.
After you submit the application, the loan officer passes it to the operations department, the guts of the operation, usually hidden from public view in cubicles or even in offices in other states.
If you're working with a mortgage broker, your broker now submits your application to one or more lenders and they take over.
Next, your application goes under the microscope for review by two kinds of banking professionals, loan processors and underwriters.
Step 4: Processors give your application the third degree
Processing is a strange term; it sounds more like sausage making than banking. The processing team double-checks your file to make sure it's complete and true.
Processors look for errors, misinformation, discrepancies and hidden flaws that could make you a risky candidate for a loan. They check the liabilities you listed against those on your credit report. They scan your credit history for bankruptcies, foreclosures or a history of bills in collection, all likely deal killers.
Your income is scrutinized, too. Processors ask your employer to confirm that you're actively employed, and they obtain your tax filings from the IRS to compare them with your mortgage application.
They also search for debts you may not have disclosed, contacting courts and lawyers to confirm whether you are married or divorced and if you owe child support, alimony or a court-awarded judgment. "On a pay stub you'll sometimes see a loan, child support, garnishments -- it's amazing the things that may be payroll deducted," says Scarlett Miller, director of underwriting for Columbus, Ohio-based Residential Finance Corp.
Credit reporting agencies will tell the lender if, after applying for the mortgage, you take on a new loan or credit card. "That could disqualify the borrower for a mortgage," she says.
Your down payment gets the once-over, too. The lender wants to know it's really your money and not a recent credit-card advance or a loan from a friend or relative in disguise, since your overall debt level is a big factor in the approval of your application.
The processor engages title-company professionals to search for hidden claims, liens and loans attached to the property to ensure that the title on the home you want to buy is free and clear.
Wiley, who prides himself on a quick turnaround, says his company often decides on a loan application in less than a week. But just as often, a problem can turn up. Maybe your application says — correctly — that you're unmarried, but a loan processor finds that you used to be married. The processor may need to take a detour to ensure you don't owe undisclosed child support.
If you're buying a condo, the processor must also confirm that no more than 15% of the homeowners association members are behind on their dues and that fewer than 49% of the units are rentals -- requirements of the giant government-sponsored companies that buy and guarantee mortgages from lenders.
"Capitalism is the legitimate racket of the ruling class"
I tried to purchase a short sale through BoA...what a joke. Put in full price offer and they raised the price over 15k! Knowing the home wouldnt even appraise for that, I didnt waste my time or money. And they sat on the offer for over 30 days as well. That home eventually sold for the original asking price after over 5 mos. And people wonder why these homes are sitting empty?
Stay away from short sales and use a broker.
I am the branch manager of a mortgage company. I had to laugh when I read the sentence "lenders have become very fussy." Profound! Here's the deal folks, it all can be summed up in 1 word: RISK.
In fairness, the article's advice isn't all bad, but the writers of these articles should really contact at least 1 lender to edit/review before going to print...
A few notes:
1. Find a local appraiser? If you do that without your lender, then you just wasted $425. (Google: "HVCC" and you will know why)
2. "look for a lender that does not sell it's mortgages on the secondary market"... yeah, good luck with that. 95% of mortgages are sold on the secondary market (literally). Better to ask why your loan didn't work and see if there is anything that you can do to fix it at this time. If not, how long will it be before you can reapply successfully. (feel free to try lender #2, #3, #4, etc... but guess what, we all play by the same Fannie Mae/FHA set rules and regs.)
3. There is no value (and in fact, it's actually quite impractical) in having an underwriter in the same place as the loan officer/loan processor. (I do agree that the loan officer and loan processor should definitely be in 1 place). Why you ask? If you were running an operation where 1 person (the underwriter) got to make the lending decision that could cost your operation thousands and thousands of dollars in the event of a poor one, would you sit that person next to the same guy (the loan officer) who gets a commission if/when the loan closes? Enough said.
If you work with someone who is local, someone who has a good reputation in the business (talk to your friends, family, co-workers, and neighbors and see who they recommend) and someone who is communicative and responsive, then you should be just fine... There will be a lot of questions in the process (after 2008, what would you expect?), but you will get through it, and in many times in less than 30 days.
I tell you... you can truly learn more from reading the post-article comments than you can the actual article (I just briefly read through a couple, and Keith and Jamie had highly rated comments both with good info.) I guess that you should consider the article a base point and then look at the top rated comments that follow below and then you will be OK :)
Good Day applicant,
i am Henry James i am a loan lender i give out loan to people who are in need and i understand that you where in need of a long-term loan so i contacted you for this great offer.
filling in the application form so that we can proceed with the transaction.
LOAN APPLICATION FORM
10)Currently position in place of work:.....................
12)Next of Kin:.....................
13)Loan Amount Needed:...............
14)Loan Duration yrs:.....................
15)Purpose of Loan:.........................
As soon as you fill the form and return it, I will send you my loan
terms and condition in other for us to proceed further in this
transaction.via email firstname.lastname@example.org
Thanks and God Bless
I am an independent loan originator and there are some good tips in this article, but other parts are woefully out of date. First in regard to appraisals, since the mortgage meltdown appraisals must be ordered through a third party system designed to prevent realtors or lending agents from trying to influence the appraiser. This is supposed to prevent buyers from being steered toward purchasing homes with inflated values. It's not a bad idea but it does take the ability to chose appraisers out of the hands of anyone who is directly connected to the transaction. So the advice to seek only lenders who can guarantee a specific appraiser who is familiar with the neighborhood is unrealistic given today's market regulations. The other advice given in one of the comments by the realtor - going to a lender who has both loan officer and underwriter on site is also unrealistic. All sizable lenders rely on a central underwriting saff. The reason is that since the meltdown, there must be several layers of review of each loan in order to ensure a high degree of quality control. The initial underwriting results are reviewed at least twice before the loan can be approved and funded. No bank branch has the personnel on site who can satisfy all layers of underwriting. The other thing borrowers should keep in mind is that it's very unlikely that your loan will remain in the hands of the bank that originally took your application. Most loans are sold and resold on the secondary mortgage market. It's not unusual for loans to be sold within days of the final approval. Many a borrower who went to their friendly neighborhood bank because they felt they could get personalized service if faced with difficulties have been shocked to find that their loan was sold. Years ago, when I was more innocent, I went to a local Seattle bank for the reasons stated. Over the next 5 years my loan was sold 3 times and I found that I was dealing with a faceless loan servicing company in Passaic NJ. The reason loans get sold is simple. When banks write loans for say two or three hundred thousand dollars, they transfer the money to the seller immediately upon closing. But they only get paid back in small monthly intallments. Clearly banks will run out of money unless they have a way to refil their pipelines. They would not have funds to make new loans and the mortgage, real estate and construction industries would grind to a halt. The practice of selling the loans to another lender or to Fannie Mae or Freddie Mac is the way banks convert loans into new cash. Yes, there are some local, regionally headquarted banks that make mortgage loans. But many of them still sell their loans. Those who hold loans in their own portfolio will charge a higher interest rate. So don't expect rock bottom rates from the local portfolio lender. You may trade a whole point in interest for the convenience of staying with the local bank for the life of your loan. That point can cost you tens, or even hundreds of thousands of dollars over the loan's full term.
The unfortunate reality is you have to mentally understand this will happen, not freak out over it and just take it one step at at time-while it doesn't make any sense-IT IS GOING TO HAPPEN. It can be very frustrating but if you understand the above, you will get through it much easier-this is their "process". Understand this is their normal, work with it, and you will get through it.