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4C's
Capacity
Credit History
Capital
Collateral
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Buying a Home
What Happens After You Apply?
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. In general, the standard
guideline lenders use is that your monthly mortgage payments (including
mortgage principal,
interest, taxes,
and insurance)
should be no more than 28 percent of your gross monthly income and
that your monthly debts (including your mortgage payment) should
not be more than 36 percent of your gross monthly income. These
guidelines are flexible and may be increased somewhat, depending
on your situation and the type of loan program you apply for.
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.
Follow-Up Tasks, Decisioning, and Time
Frames
After you've submitted your application, a flurry
of activity begins. It normally takes approximately 30 days for
a loan to be funded.
- We will mail you the Good Faith Estimate and Truth-in-Lending
Package with the Rate Lock information (If you chose to rate
lock). You should receive this within 10 business days. There
are documents in the package that you need to sign and return.
- You must provide us with copies of your pay stubs They can
be faxed, e-mailed or mailed with the Good Faith Estimate and
Truth-in-Lending Package.
- Purchase Transactions: If you've already found a property,
you must fax the purchase contract to us. It must include the
realtor's name.
- Now the underwriting process begins. Time frames vary depending
on the circumstances of your application. Under normal circumstances,
this takes approximately 1 week.
- Next, we will order the appraisal/title. Time frames vary.
- Once all the information has been received, your loan is either
approved or denied. This decision process normally takes approximately
1 week. You will be notified by phone and mail when a decision
has been made.
- If your loan is approved, either a representative of the financial institution
or a representative of the Title company will contact you to
schedule a time to sign the documents.
- Refinance Transactions: You have the right to cancel
the transaction for 3 business days.
- Purchase Transactions: We fund the loan. A check is
issued to the title company to pay off the other lender.
Refinance Transactions: We fund the loan and deposit
the proceeds into your savings account.
- The final closing statement will be mailed to you from the
title company.
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.
Seek
Outside Home Counseling Help
If you have credit problems, one alternative is to seek the help
of a nonprofit credit counseling organization. Most communities
have at least one such organization listed in the phone directory.
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