After you have contacted several lenders, you many conclude that one lender is quoting the lowest interest rate, but another lender charges less in upfront costs payable at closing. Perhaps another lender has the most favorable lock-in policy. That's why you need to select the features that are most important to you.
When you have decided which lender offers the kind of mortgage you want, with the best terms for your situation, you're ready to make a formal appointment with the lender. Request that a loan application be faxed or mailed to you and ask what kind of documentation you should bring with you to the interview.
With improvements in technology, you may apply for a mortgage loan online or fax your documentation to the lender's office rather than arranging for a face-to-face visit. However, you will need the same types of documentation whether or not you actually visit the lender's office.
It is important to prepare for the loan interview. Try to anticipate everything you will need and have all the necessary information (including names, addresses with zip codes, phone numbers, dates of employment, etc.) readily available. If you and your co-purchaser will both be signing the mortgage, you should both go to the loan interview.
You will speed up the loan processing if you bring the following documents with you to the loan interview:
- The purchase contract for the house
- Your bank account number(s)
- Address of your bank branch
- Your latest bank statement
- Pay stubs or W-2 forms for the past two years, or other proof of employment and salary (if you are self-employed, balance sheet, tax returns for the past two years, and year-to-date profit and loss statement)
- All credit card numbers, and names and addresses of your current creditors
- Previous credit references, paid-off loans and other credit, including account numbers and type of loan
- Evidence of your mortgage or rental payments such as canceled checks or money order receipts
If you have not already been pre-qualified by the lender, the loan officer will first want to make sure you qualify for the loan you are applying for. As we discussed here, lenders have traditionally required that your monthly mortgage payment (including taxes, insurance, and condo fee, if any) not exceed 28-percent of your gross monthly income, and that your monthly mortgage payment plus existing debt payments not exceed 36-percent of your gross monthly income. (These guidelines may be exceeded in certain circumstances, for example, with excellent credit or a substantial down payment).
The loan application
If you have not already done so, the lender can help you fill out the loan application. You may choose to work with a non-profit housing counselor in completing your loan application, or have your mortgage broker guide you through the process. The loan application form is designed to provide the information the lender needs to evaluate the risk involved in lending you money, and the likelihood that you will (or will not) repay the loan.
Lenders speak of the "four Cs":
- Credit capacity
- Credit history
Can you repay a debt? Lenders ask for employment information: your occupation, how long you've worked, and how much you can 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.
Will you repay a 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.
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 you purchase the home, or will you spend your last penny at settlement?
Will the lender be fully protected if you fail to repay the loan? Lenders must be sure that the property you are buying is sufficient to back up your loan.
Some additional considerations
You will not help yourself by trying to cover up past credit problems in hopes that the lender won't discover them. Again, it may be a good idea to ask for help from a non-profit housing group, as discussed here, especially if you want to assemble documents to build a non-traditional credit history.
Once you have signed the loan application, you may be bound to accept the loan if it is offered to you, or to pay the lender's processing costs if your application is rejected. Be sure the application states amounts and terms that are acceptable to you.
Until recently, the underwriting process was always done manually, with the underwriter having to review and evaluate each piece of information separately. Today, many lenders are using automated underwriting, an innovative and important tool in the mortgage industry.
How does automated underwriting work?
Automated underwriting is a computer-based method that enables mortgage lenders to process loan applications in a quicker, more efficient, objective, and less costly manner. The lender enters information from the borrower's application into its own computer system. This information is then communicated electronically to an automated underwriting system like Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector, and a credit report is obtained. The automated system evaluates different pieces of information and gives the lender a recommendation about whether the loan meets the criteria for approval. The lender considers the recommendation, along with the information gathered, and makes a final decision. The lender always makes the final decision, not the automated system.
What are the benefits of automated underwriting?
Using an automated underwriting system streamlines the review and approval process. Because each loan is evaluated in the same, objective way, lenders are able to identify more qualified borrowers and make more loans. For example, a borrower may have successfully managed credit in the past, which could be considered a strength. This same borrower may also have accumulated a lot of debt or may be making only a small down payment. These factors could be considered a potential risk to the lender. The automated underwriting system, however, is able to evaluate all the information in a way that recognizes that a borrower's strength in one area can offset other risks. As a result, more borrowers are able to qualify (and be approved) for mortgage loans.
Keep in mind
It is not unusual for a lender to ask for a written explanation of any negative items that appear on your credit report. Even one late payment on just one account may require a written explanation.
Don't be alarmed by this request. Just respond promptly with a truthful statement about whatever circumstances may have caused the late payments.
Automated underwriting and credit scores are tools that help the lender evaluate all of the information they have gathered about you, your financial situation, your credit history, and information about the value of the property you plan to buy. Although the final decision whether to approve or deny your mortgage loan application is made by the lender, not a computer, the use of these tools, combined with solid underwriting knowledge, makes the process of underwriting a loan faster, more efficient, more objective, and less expensive.
Locking in the current rate
If you are concerned that interest rates may rise during the time the loan is being processed, the lender may agree to lock-in the current rate (and number of points) for a given period. Find out when the lock-in takes effect and how long it remains in effect. Get the lock-in agreement in writing. A lock-in for a very short time period may be useless; you want something that will get you to closing, without having to be extended.
Estimates of closing costs
Within three days after you have submitted your application for a home loan, the lender is required by law to provide you with an itemized estimate of the cost to settle (or close) the loan. This report is referred to as a "good faith estimate." The lender must also give you required government publications related to closing costs, which is discussed here.