Scientists who study and measure human behavior find that buying a home is one of the most stressful experiences of our lives. Contributing significantly to this anxiety is waiting for the mortgage to be approved. Much of the homebuyers' unease results from not knowing what is going on. You know credit checks and verifications of employment are taking place-but what makes the difference between getting or not getting that loan, and how long does it take? This page can dispel at least some of that anxiety by detailing the steps the lender takes in making the loan decision-process called "underwriting." Listed below are the topics addressed on this page.

• Are You a Good Risk?
• The Initial Interview
• Consumer Safeguards
• Is Your Income Sufficient?
• Income Requirements
• Income/Expense Standards
• Debt
• Is Your Credit Good?
• Credit Information Safeguards
• Can You Make The Down Payment?
• Is The House Worth The Price?
• Do I Get The Loan?

Are You a Good Risk?

Just as wise stock market investors carefully research the companies in which they plan to buy stock, careful mortgage lenders investigate the financial background of each loan applicant. In lending the prospective homebuyer the money to buy the home, the lender assumes a long-term risk. The assumption is that the borrower is going to eventually repay the loan and in the meantime make the loan payments on time.

Once all the information is collected and eligibility is established, the lender decides whether to extend the homebuyer credit. In other words, lenders analyze the risk of lending (making the investment), and match it to an appropriate interest rate and loan term.

There are established, industry-wide standards for underwriting, and most lenders follow standards set by government-related agencies, private mortgage insurers, private mortgage investors or institutional investors. The vast majority of mortgage lenders attempt to approve a loan application if prudently possible, but to approve a loan that will become delinquent serves no one's best interest. The burden falls on the lender to establish that an applicant is qualified.

The Initial Interview

The process usually begins with an interview where the prospective borrowers and a representative of the lender discuss the potential loan. Increasingly, however, lenders are not requiring a face-to-face meeting and accept a completed application by mail or through the internet. Most lenders today will even qualify you for a loan before you begin to shop for a home, which it the right way to purchase. Knowing approximately how much money you are qualified to borrow can save you time and prevent disappointment when you are looking at houses.

When going to apply for a loan, you should have available:

• Purchase contract for the house, if you have one.
• Certificate of Eligibility from the Veterans Administration (VA) if you want a VA loan. (Note: If you do not have one, the lender will obtain the information for you from your service records.
• Bank statement for the past 2 months for all of your accounts.
• Copy of your Driver's License and Social Security Card.
• Pay stubs, W2 forms or other proof of employment and salary.
• If you are self-employed, you should be able to present balance sheets, tax returns and other information about your business.

The important document that gets the whole process rolling is the loan application. It asks in-depth questions concerning you, your income, assets and liabilities, your credit, and your legal history, as well as a description of the property you wish to buy. We will verify the information you provide on the application before making the decision whether to extend the loan.

Once we recieve your applicantion we will run your information through our automated underwriting engine. In most cases we will let you know if your are qualified for the type and size of loan they want within 24 hours. We try to let the your know as quickly as possible if you are not qualified for the size of loan that your requested.

Consumer Safeguards

The initial application sets in motion some important consumer safeguards. The Truth-in-Lending disclosure requirements provide the applicant with an estimated yearly cost for the loan - the Annual Percentage Rate (APR). The other important disclosure that follows from the Real Estate Settlement Procedures Act (RESPA), a federal law. This requires lenders to provide homebuyers with information on known and estimated closing costs.

Is Your Income Sufficient?

Following the initial application, one of the first step the we takes is to verify your employment or income. This is done by mailing employment and income forms to current and past employers, or by reviewing paystubs, W-2's, or tax returns as applicable. This allows us to determine how much debt you can successfully take on.

Income Requirements

A general rule is that you can qualify for a loan of up to three times the family's income (i.e. a family with income of $30,000 a year usually can qualify for a mortgage of up to $90,000). Often, the amount you earn may not be as important as how you earn it. Bonuses and commissions can vary greatly from year to year, and we may reluctant to depend on them if they make up a large percentage of your income. There are similar problems when a large portion of your salary is based on overtime pay, and you rely on it to qualify for the loan. In the case of bonuses and commissions, the we will want to verify your bonus and commission status back two or three years to get a better idea of what you earn from those sources on average. In the case of overtime, we will establish whether the work is expected to continue and whether or not the amount of overtime income is reasonable for the extra work. After establishing these points, the we will make a decision as to how much to allow for these additional sources of income.

If you are self-employed, you should plan on producing a profit and loss statements and copies of your federal income tax returns for the past two or three years. Tax returns may also be required to verify other income claims, such as when income from securities is a major source for mortgage payments.

Income/Expense Standards

Lenders use a set of general standards (income/expense ratios which show how much income is used for various expenses) to test the application for qualification. These standards are based on what experience shows a homeowner can spend to own the home and also take care of other long-term financial obligations, though lenders use their own discretion in making the final decision.

Lenders generally say that housing expenses (including mortgage payments, insurance, taxes and special assessments) should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. For Federal Housing Administration (FHA) loans, this figure is not to exceed 29 percent of the homebuyer's gross monthly income. With loans guaranteed by the Department of Veteran's Affairs (VA), lenders measure prospective homebuyers with Residual Income, or the monthly income minus expenses. The remainder is then measured against geographical and family size data to qualify the borrower.

We will work out these figures for you when you complete your application and produce the necessary income documents. Remember these are just quidelines and it is very common to make exceptions provided that are compensating factors.

Debt

Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future. These expenses should not exceed 33 percent to 36 percent of the homeowner's gross monthly income. FHA-insured mortgages define long-term debt as monthly expenses extending 12 months or more into the future, and look for these expenses plus housing expenses not to exceed 41 percent of the homeowner's gross monthly income.

Is Your Credit Good?

Before extending credit, lenders will want to examine the risk of not getting the money back. To do this lenders will look at four crucial aspects of your credit history when you apply for a mortgage:

• History of past credit - what were the size and terms of past loans?
• Type of Credit - have you obtained real estate, auto, personal or other installment loans in the past?
• Attitude toward credit - are active accounts current , and is there any recent bankruptcy or judgment?
• Lapses in employment or debt repayment - how many unexplained lapses are there, and for how long?

From the information uncovered by these four questions, lenders can develop a fair idea of just how you will handle your responsibilities once you have signed the contract for repaying the loan. However, lenders cannot examine everything when putting together a credit history. They have two extremely important limitations on credit information gathering.

Credit Information Safeguards

The first limitation is the Fair Credit Reporting Act, which was designed to ensure fair and accurate consumer credit reporting. The Fair Credit Reporting Act stipulates that lenders must certify the purpose for which the information is sought and use it for no other purpose. The Act also prohibits reports based on subjective information from neighbors and others concerning character, general reputation and other personal aspects. Certain other credit information, such as bankruptcy more than seven years before, is also prohibited unless the principal involved in the action was $50,000 or more.

The second consumer safeguard limiting the credit information lenders can use to make a mortgage decision is the Equal Credit Opportunity Act (ECOA). ECOA prohibits discrimination in lending based on race, color, national origin, sex, marital status, age (provided the applicant may legally contract), and the fact that all or part of the applicant's income comes from a public assistance program.

Lender's are also prohibited by law from asking:

• questions concerning the applicant's spouse, unless
  • the spouse will be contractually liable,
  • the spouse's income will be used to qualify,
  • the applicants live in a community property state, or
  • the applicant will use child support, alimony or separate maintenance payments from a spouse or former spouse to qualify.
• questions concerning future parenting plans (although the lender may ask the ages and current number of children the applicant has).

Can You Make The Down Payment?

Lenders expect homebuyers to have enough money available to make the down payment based on the loan that program selected. If you cannot come up with a 20 percent down payment, a lender can make you a loan for as little as 0-3 percent down. You will be required to carry private mortgage insurance for conventional (not FHA or VA loans), for which you will pay an additional monthly insurance fee.

Sources on which prospective homebuyers may draw for the down payment and the closing costs include savings, stocks/bonds, Individual Retirement Accounts (IRAs), pension funds, real state holdings, life insurance policies, mutual funds or employee savings plans.

Homebuyers may also rely on another source of funding for the down payment-a gift, or money given by a parent or other relative that need not be repaid. a person may give another person up to $10,000 per year without either party being taxed. A married couple, therefore, could give a child or spouse as much as $40,000 for a down payment tax-free. Remember, however, that if you use gift money for a down payment, you will need to present a letter so stating and signed by both the giver(s) and the receiver( s) to your lender.

Mortgage lenders send a form to the homebuyer's savings institution(s) to verify the amount available for purchasing the house, as well as the amount of outstanding loans with that institution.

Is The House You Are Buying Worth The Price?

Mortgage lenders also examine the real estate being purchased to make sure that, in case of foreclosure, the lender has a salable property. The property's acceptability is established by an independent appraisal.

The appraiser looks not only at what the home is worth today, but how the neighborhood's dynamics will affect the property value in the future. The three main points the appraiser checks are:

• Physical security of the property.
  • age, structural soundness, landscaping, etc.
• Location.
  • The kind of neighborhood, surrounding houses, access to transportation, commercial development nearby, etc.
• Local government's plans for the area.
  • how zoning and taxes will affect the property in the years to come.

Do I Get The Loan?

Once we have made all the checks. Your income, credit, assets, property and all necessary documentation have been scrutinized. Now comes the big decision.

If our decision is to extend the credit, you will be notified. We may approve you the homebuyer for the entire amount asked for, or a lesser amount based on the borrower's qualifications. The approval will then be explained to you. Many time the conditions are very simple. If the decision is not to extend the credit, we will again noitfy you. This notification must also include the reason(s) for the rejection. Your Loan Consultant will work with you to try and help you overcome these issues or suggust and alternative loan product.

By now you should feel a bit more at ease about what happens after you apply for a mortgage. If you have a good credit rating, it will speak for itself. Also, it is up to the lender to prevent homebuyers from over-extending themselves to the point of losing their homes. Prudent underwriters should prevent this from occurring.

Certainly there will always be some anxiety associated with applying for a mortgage, but if you understand the process, waiting for approval will be far less worrisome.

Though this process might seem quite lengthy, with automated approvals and the use of technolgy, initial approval can be issued the same day or usually within one business day. Final approval also only takes a few days. Remember, you can speed the process up by being prepared with all of your documents and providing them to us in a timely fashion.

If you have questions, please send email to Customer Service.

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