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 based on your monthly mortgage payments and your
total monthly debts. In general, your monthly mortgage payments (including
mortgage principal, interest, taxes, and insurance) should not exceed 28 percent
of your gross monthly income and your monthly debts (including your
mortgage payment) should not exceed 36 percent of your gross monthly
income. These are merely guidelines. A lender may be willing to lend
you more based on your individual circumstances.
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. You should also
consider the following:
Investigate
Affordable Housing Loans
If you have insufficient funds for closing
costs and a down payment,
or insufficient income to afford the house you want, you should investigate
alternative financing arrangements. Fannie Mae®, has
designed a wide range of loan programs for low- to moderate-income
borrowers, including its Community
Home Buyer's Program(SM), Fannie
97® (a 3 percent down payment loan), Housing Finance
Agency Programs, and others. These loan programs allow a lower down
payment, more flexible underwriting
ratios, and a nontraditional credit history. For a list of lenders
in your area who offer these programs, simply call us toll-free at
1-800-7FANNIE (1-800-732-6643) or send us an e-mail
message.
Seek
Outside Home Counseling Help
If you have credit problems, seek the help of a
nonprofit credit counseling agency. We would be happy to
provide you with a list of nonprofit housing education
providers in your community through our HomePath®
initiative. HomePath links people who need personal
assistance in preparing for homeownership with someone
who is trained to help in their communities. Or, if local
help is not available, obtain home-buying
guidance directly from specialists on Fannie Mae's HomePath staff.
Just call us toll-free at 1-800-7FANNIE (1-800-732-6643).
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