The loan application is the
most important form a borrower will fill out regarding home financing. Since
most underwriters never meet the borrower, the application will be the only
means by which an applicant can be judged creditworthy. For this reason, it
is important to fill out the application completely and correctly. Once a
potential borrower fills out an application, both the buyer and the property
to be purchased are put under close examination to determine if one, both
or neither qual ify. To help us explain this process, we will use our favorite
hypothetical buyer, Mortimer Gage.
When we last left Mortimer
Gage, he and his wife were determining if they had enough money to cover the
additional costs involved in completing their home purchase. Knowing that
they did have enough money to cover all the costs, Mortimer and Mortic ia
both decided to apply for the loan at a nearby lending institution (The Bank
of Suburbia).
Their loan officer, Len D.
Money told the Gages that the completion of a loan application provides a
lot of information for the lender, but it also provides helpful information
to the buyer. Law requires that lenders provide certain notices to the b uyer.
The Equal Credit Opportunity Act, The Right to Privacy Act, flood insurance
statement, homeownerÕs insurance statement, mortgage payment statement and
the Tax Escrow Act are all provided to the applicant prior to completion of
the application. The applicant will also receive a booklet that describes
closing costs, accompanied by a Good Faith Estimate of what the applicant's
closing costs will be. These two items must be provided by the lender within
3 business days after the applicatio n is filed.
At this point the buyer also
decides whether to float or lock the interest rate on the loan. If a buyer
floats the loan, he is telling the lender that he wants to take a chance on
rates lowering at a later date, by agreeing to use the prevailing rat e at
a specified date prior to closing. If the buyer chooses to float the loan,
he runs the risk of interest rates rising, and the possibility of no longer
qualifying for the higher mortgage payments. If the buyer locks the loan,
he is choosing the current rates (at the time of application) to finance the
loan. If the buyer locks the loan, he is guaranteed that interest rate.
When Mortimer finished filling
out the application he asked Len how long would it take for the bank to process
the loan. When Len told Mortimer that it would take 30 to 45 days to complete
the processing of his application, Mortimer was confused. Mortimer asked Len
why it took so long to complete this process.
Len explained that once the
application was filled out, the loan officer finishes all related paperwork
and gives all of the information to the loan processing department. While
in the processing department, all facts regarding the buyer and the pro perty
will be checked for accuracy. The loan processor completes and mails the required
buyer verifications (employment, rent, deposit, mortgage) and orders the credit
report. In order to verify facts on the property to be purchased, the loan
proce ssor also orders an appraisal and a title report for the property. Mortimer
understood that the lender needed the verifications to check the accuracy
of the information on the application, and that the credit check was to determine
if he was respons ible and financially able to pay the mortgage payments.
Mortimer did not understand
the importance of the appraisal and the title report, so he asked Len to explain
to him why they were important. Len explained that banks make home loans on
the basis of the appraised value of the property or the purchase price, whichever
is lower. In the event of borrower default, the home is the collateral for
the loan. The lender does not want to grant a loan that is larger than the
value of the collateral. For example, If the amount owed on a home mortgage
is $100,000 and the property is only worth $80,000, the buyer has little to
lose by defaulting on the mortgage, but the lender has $20,000 to lose. This
is the reason why lenders require Private Mortgage Insurance (PMI) for conventional
loans with a d own payment of less than 20%. The appraisal also determines
the condition of the property. The lender does not want to lend money for
a house that is fit to be condemned, which could result in borrower default.
The title report is ordered to see i f there are any liens against the property
in question. The lender wants to ensure that they are the only party that
has claim to the property, in the event of borrower default. If they are not
the only claimholders, they still may consider the loa n depending on their
priority on the claimholders list.
As these items are completed
and returned to the processor, any variations are noted, recalculations completed
and the stragglers chased down. The credit report is reviewed and if there
are any derogatory items, letters of explanation are requested of the borrower.
The appraisal is reviewed to see if it meets investor, FHA, Fannie Mae or
Freddie Mac standards. Most mortgages are sold to these institutions for investment
purposes. These institutions will not buy mortgages from lending institu tions
unless they meet their minimum requirements.
Mortimer was impressed with
the thoroughness of banks when processing loans. Mortimer then asked Len "After
this process my loan will be approved, right?". Len told Mortimer that his
application, and all of the collected information will be package d and sent
to the underwriting department. The underwriter examines the applicantÕs file
and determines if the applicant as well as the property to be purchased meet
the criteria and guidelines of the investor (FHA,fannie Mae,Freddie Mac, other
inve stors). The underwriter considers the buyer's ability to pay the loan,
if the buyer has the cash required to pay closing costs, the property's condition
and value and the buyer's overall credit worthiness. After consideration of
all of this informa tion, the underwriter will decide whether to approve,
suspend, or deny the loan to the applicant. A suspension would occur if the
underwriter feels that there is additional information needed to meet the
investor's criteria, such as a missing W-2 Fo rm, a doctor's letter regarding
an illness, an attorney commenting on a lawsuit, or an accountant explaining
unusual financial statements.
Len told Mortimer that if
his loan is approved, his file will be moved to the closing department, where
the arrangements to schedule a closing and request for any last minute requirements
will be made. Mortimer will be given a closing date, time, an d location,
and a dollar amount of the closing costs that must be brought to the closing.
Now Mortimer fully realized why it can take between 30 and 45 days for a loan
to be approved. Mort asked if there was any way to speed up the process. Responding
promptly to the lender and exercising prompt communication between all parties
involved is the best way to get through this process as quickly as possible.
Mortimer asked Len "I only have one more question, what do you think my chances
are for my loan to be approved?". Len told Mortimer that he had been a loan
officer for 10 years, and after considering his application, he thought Mortimer
had a good chance of being approved.
One Month later Mortimer
received a phone call from the Bank of Suburbia. Good news, Mortimer and his
wife were approved!! Mortimer is only one step away from owning his dream
home. Be sure to read next month's issue, when Mortimer and his wife Morticia
attend the closing procedures of their home purchase.
Go
to Part 6: Closing the Transaction
