Meeting with a loan officer and completing paperwork are just the beginning. What happens once everything has been submitted? Here's a look at 5 steps your application takes as it marches toward a decision from your lender, and what to do if your application is rejected.
Applying for a mortgage loan can leave even the savviest consumers scratching their heads in confusion.
To lift the veil of mystery around the mortgage-approval process, we peeked behind the scenes at an application's five-step journey with a lender. We also learned three tips for helping to speed your application toward approval and five ways to improve an application if your loan is rejected.
Step 1: Talk with a loan officer.
Your first and probably only contact with your lender is your loan officer, the salesperson who takes your application. When you first meet, the questions on your mind are likely to be, "Do I qualify for a loan?" and "How much can I borrow?" The loan officer is probably wondering, "Am I going to be able to sell a loan?" It's a courtship.
This first meeting is a simple, no-commitment step, conducted in an office or on the phone, or you may fill out a form online. You reveal a few basics — your name, your income, your debts and your estimated credit score. Your lender looks up your "tri-merge" credit score, which includes scores from the three biggest credit-reporting agencies.
You're itching to get a "thumbs up" or "thumbs down." Do you qualify or don't you? But the loan officer has only your word to go on at this point, so don't expect to get an ironclad approval. Not yet. The answers you'll get at this stage will be versions of, "It depends."
The loan officer might say, "If what you've told me about your income, credit score and debts all checks out, yes, you'll qualify for a loan. Let's submit the application and find out." Or you might hear, "It looks like you'll qualify, but for less money than you're hoping for." Or, "You're probably not eligible right now, but your chances would improve if you save up a larger down payment or pay off your car loan."
At this stage you can be "preapproved" and get an estimate — not a promise — of how much you can borrow.
If you're refinancing, your application is ready for the next stage of the process. If you're buying, you may not be able to get a good faith estimate (GFE) and a preapproval without choosing a home to buy, because the home, too, must pass muster. The bank needs to know what it's worth and what shape it's in. After all, if you default, the bank will become the owner.
Still, it's a good idea to apply before house hunting, with one or several lenders. That way, the process can move quickly when you find a home.
Savvy borrower tip No. 1: Look for a lender who takes your application seriously enough at the preapproval stage to run your application through Desktop Underwriter or Loan Prospector, software programs used to qualify borrowers, says Bryan Wiley, loan officer at Guild Mortgage Co.'s office in Bellevue, Wash. This will speed up the approval process by providing an early warning of problems your application might face.
Step 2: Fill out your application.
Here's where your real work begins. You answer the questions in the borrower information sections (Sections III, IV, V and VI) of the Uniform Residential Loan Application. (All lenders use the same form. It's here, at FannieMae.com.) It asks your name, address and Social Security number, housing and employment history, income and housing expenses, assets and debts. Your loan officer can help you with some questions, but you'll need to take it home to add up your monthly expenses and find documents such as old W2 forms, tax records, 401(k) and IRA documents, bank statements and addresses of old employers
Whether refinancing or purchasing, you'll need to hire an appraiser at this point to get an expert valuation of what the home is worth.
Savvy borrower tip No. 2: With home values uncertain these days, your best chance for an accurate appraisal is with a local appraiser who knows your neighborhood. Avoid lenders who use out-of-town appraisers. Don't know? Just ask.
Step 3: Submit your application.
When you hand your application to a loan officer, the clock starts ticking. Within three days, the lender must give you a packet of "disclosures" including:
- A good faith estimate (Here's the GFE, a PDF file), describing the loan, costs and terms offered.
- A truth-in-lending form, disclosing the loan's annual percentage rate, the number to use in comparing competing loan offers.
The lender's offer is conditional. The information on your application has to check out.
After you submit the application, the loan officer passes it to the operations department, the guts of the operation, usually hidden from public view in cubicles or even in offices in other states.
If you're working with a mortgage broker, your broker now submits your application to one or more lenders and they take over.
Next, your application goes under the microscope for review by two kinds of banking professionals, loan processors and underwriters.
Step 4: Processors give your application the third degree
Processing is a strange term; it sounds more like sausage making than banking. The processing team double-checks your file to make sure it's complete and true.
Processors look for errors, misinformation, discrepancies and hidden flaws that could make you a risky candidate for a loan. They check the liabilities you listed against those on your credit report. They scan your credit history for bankruptcies, foreclosures or a history of bills in collection, all likely deal killers.
Your income is scrutinized, too. Processors ask your employer to confirm that you're actively employed, and they obtain your tax filings from the IRS to compare them with your mortgage application.
They also search for debts you may not have disclosed, contacting courts and lawyers to confirm whether you are married or divorced and if you owe child support, alimony or a court-awarded judgment. "On a pay stub you'll sometimes see a loan, child support, garnishments -- it's amazing the things that may be payroll deducted," says Scarlett Miller, director of underwriting for Columbus, Ohio-based Residential Finance Corp.
Credit reporting agencies will tell the lender if, after applying for the mortgage, you take on a new loan or credit card. "That could disqualify the borrower for a mortgage," she says.
Your down payment gets the once-over, too. The lender wants to know it's really your money and not a recent credit-card advance or a loan from a friend or relative in disguise, since your overall debt level is a big factor in the approval of your application.
The processor engages title-company professionals to search for hidden claims, liens and loans attached to the property to ensure that the title on the home you want to buy is free and clear.
Wiley, who prides himself on a quick turnaround, says his company often decides on a loan application in less than a week. But just as often, a problem can turn up. Maybe your application says — correctly — that you're unmarried, but a loan processor finds that you used to be married. The processor may need to take a detour to ensure you don't owe undisclosed child support.
If you're buying a condo, the processor must also confirm that no more than 15% of the homeowners association members are behind on their dues and that fewer than 49% of the units are rentals -- requirements of the giant government-sponsored companies that buy and guarantee mortgages from lenders.
Step 5: The underwriter makes the decision
You'd think your application would be home free once the processing is done. But there's one final hurdle: underwriting.
The underwriter weighs the risk of lending money to you and decides if it's in the lender's interest. The underwriter may already be familiar with your application. To speed things along, processors often consult with the underwriting department. The idea is that it helps the underwriter anticipate what he will need to make a judgment.
Since your lender probably will sell your loan to another company, the underwriter needs to make certain your application meets mortgage lending guidelines from Fannie Mae, Freddie Mac, the Federal Housing Administration and the Department of Veterans Affairs, all of which purchase loans. Each agency has slightly different requirements for, say, the size of a down payment or credit score required. Your lender may have guidelines, too.
If your application is simple, it's processed quickly, sometimes in just a few days. Typically, it's solid if:
- Your assets, income and debts listed on the application check out.
- The home you're buying has a clear title and passes a home inspector's scrutiny, and the appraised value isn't less than what you've agreed to pay.
But plenty of glitches, surprises and problems can crop up, even at this stage. You may get a request from the lender for still more information. For example: Let's say your salary is $48,000. It's late June, and your pay stub's year-to-date notation should show you've received $24,000 to $30,000. But, for some reason, it shows only $10,000. Alarm bells ring. The lender needs to solve the discrepancy.
"Were they off work because of surgery? Was it because they were not at the job very long?" Miller says. Or maybe it's just a mistake.
Savvy borrower tip No. 3: When choosing a lender, Seattle real-estate agent Ardell DellaLoggia advises asking if there's an underwriter on site, allowing the company to process applications faster. Also, a decision on your loan by an on-site underwriter is less likely to be subjected to second-guessing by underwriters further up the corporate food chain, she says.
What to do if you're rejected
If your application is accepted, congratulations. If not, don't feel as if you're alone. Lenders have become very fussy. More than 2 million mortgage applications were rejected last year, according to the Federal Financial Institutions Examination Council.
There are things you can do, though, to help improve your chances next time:
1. Understand what went wrong. Sit down with your loan officer to ask why your application was rejected and what you can do to improve your chances.
2. Try another lender. Another lender may offer a different loan program with guidelines that better fit your situation. Credit unions and small local banks often have more freedom to work with a client. Look for a lender that does not sell its mortgages on the secondary market; these loans may be easier to qualify for, although they may carry higher fees and interest rates.
3. Revisit the appraisal. If your problem is a too-low appraisal, you and your loan officer are prohibited by federal law from ordering a new appraisal. Occasionally, though, an appraiser will reconsider when given new evidence. If you know of nearby homes like yours that recently sold for more, your real-estate agent may be able to offer the appraiser evidence that persuades her to revise her valuation. Otherwise, the only way to get a different appraiser to value your home is to make a fresh mortgage application.
4. Repair your credit. If your credit score was slightly too low to qualify, paying off a credit card or loan may help. It takes up to 90 days for the result to show up in your score. Other strategies that take longer are:
- Close credit card accounts you're not using.
- Make every single payment on time; eventually, late payments will "age" off your credit score.
- Reduce the proportion of your available credit that you're using.
- 5. Improve your debt-to-income ratio. Big monthly payment obligations compared with your income jeopardize an application. Fixes include:
- Paying off an outstanding loan by, for example, selling your newer car and using the proceeds to get a cheaper vehicle and pay off the loan.
- Asking a free credit counselor approved by the Department of Housing and Urban Development (find one here) for help consolidating your debts. (The Federal Trade Commission tells how torepair credit and avoid scammers).
- Borrowing against your 401(k) to pay off high-interest revolving or credit-card debt.
