The mortgage application process is the first step required if you need a loan to purchase residential real estate. The correct name for this is the Uniform Residential Loan Application, and takes the form of a substantial application form in which you must provide all the personal information needed for a lender to make a decision.
It is important that you have your mortgage application approved by your lender or builder before you make an offer. The information you provide must be backed up with proof in the form of documentation.
Information Required for Mortgage Application
Identification: Your name and residential addresses over the past two years, date of birth and Social Security number. Details of landlords are required if you have been renting.
Employment: Names and addresses of your employers over the last two years.
Income: Employment income share interest, average bonuses and any other type of income backed up by pay stubs (30 last days) and a W-2 form (last 2 years).
Debt: Credit and store cards, car loans, student loans, current mortgage if any and any other forms of debt. You should provide details of any new debts that are not listed on your current credit report. You should provide details of the amount owed, the creditors’ names and contact details, account numbers and agreed monthly payments.
Bank and Other Statements: Original copies of the last two monthly statements for your savings and checking accounts. If you intend using securities for your down payment, you should provide details of these such as statements of IRAs, Certificates of Deposit, stocks and any other relevant securities.
Self-Employed: If you are self-employed you should provide your tax returns for the past year. You will also be required to provide a balance sheet and profit-and-loss report for the last financial year.
Real Estate Details: You will also be asked for details of the house you want to purchase, and how much of a loan/mortgage you are asking for. In addition, you will have to provide details of any real estate you currently own, including its address and current value. If you have an existing mortgage, you must provide your lender’s details and your mortgage account details.
This list is not comprehensive, but the above is the main information asked for. It is very important that you are completely truthful with this information, particularly your current debts, because if you are found not to be then your application will likely be refused. Some get the help of their solicitor at this early stage.
Once your building society or lender has received and processed your application form, they will continue with the next part of the mortgage application process. Although different lenders, banks and building societies will have their own procedures, this past of the process will generally involve:
Credit Reports and FICO Score
You will be asked on the form for permission for the lender to check your credit reports and credit score: normally they will simple check your FICO credit score and make a decision based on that. However, they may also check individual credit reports provided by the three major credit bureaus, Equifax, Experian and TransUnion. They will use this information along with the information you have provided to determine your ability to make repayments and to check on your record of paying previous bills, loans and debt.
This part of the mortgage application process is designed to establish your identity, your disposable income, details of the house you want to purchase and how much you want to borrow. Your FICO score will give the lender an indication of your credit-worthiness, and whether or not you have a good record of paying past debts
Collateral and Real Estate Value
A mortgage is a secured loan, meaning that you agree that your property can be sold to recover the outstanding sum in the event of you being unable to pay. The lender will therefore also check on the worth of the home you are purchasing plus that of any other real estate you own that can be possessed and sold to pay your outstanding mortgage debt.
Lenders and banks must protect their investment in this way, particularly in view of the collapse of certain sub-prime mortgage over the past decade. It is not as easy to get a mortgage today as it was at the beginning of this millennium.
Debt to Income Ratio
The lender will likely also use a ‘Debt to Income’ ratio to establish your ability to pay. Let’s say this is 28/36, a common DTI ratio. This means that 28% of your pre-tax gross income may be spent on paying for your home (mortgage, taxes & insurance), and no more than 36% should be spent on repaying your total debts. Find out what DTI ratio your lender uses, and you can work out yourself the monthly payment you will be allowed.
Once satisfied with your ability to pay, the lender will inform you how much they are prepared to lend you, the interest rate, the monthly repayments and the term over which the loan is to be repaid. You can now make an offer on your home. Most lenders will offer pre-approval, based on the factors already discussed, so that you can look for a new home knowing the amount you can afford to offer.
Finally Steps in the Application Process
Once you have found real estate you want to purchase, the lender will have it appraised to make sure that it is worth your offer price (this is the collateral for your mortgage loan), and will then issue you with a “Commitment Letter” that provides full details of the approval of the loan. This is the final confirmation that you require to complete the purchase.
This completes the mortgage application process, which is followed by the payment of the deposit, the ownership search and the conveyancing, followed by completion or closure. Then will you be given keys to your new home!