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Lender Logic

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.

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. A 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 Fannie Mae toll-free at 1-800-7FANNIE (1-800-732-6643).