The Mortgage Application & Application Process

The first step in the mortgage application process is pre-qualification. A loan officer will "pull" your credit report and get some basic financial information from you to determine if your present financial and credit situation will allow us to pre-approve you for a loan. Pre-qualifying has become important these days, especially for home buyers, because, without it, fewer and fewer owners or real estate agents will even spend their time with you. 

After you have been pre-qualified by a loan officer for a particular amount and type of mortgage and you have either placed a property under agreement or decided to proceed on a "property to be determined later" basis, it is time to actually apply for the loan. This consists of filling out a 1003 application and a number of mortgage disclosures. "Why do you need that?" is the most common question we are asked when we tell applicants what to bring when they actually apply for a mortgage. Believe it--there specific reasons everything we ask for. We have no choice about most of these forms. They are required by law or lender's mandatory guidelines that you read and approve them. Very few of them are "in-house" documents. You will be given copies of most of them without asking. If you want copies of anything else, ask your loan officer. He will be happy to oblige.

At the time of application, you may be asked to forward us a check or money order for the Residential Mortgage Credit Report (RMCR) and the Appraisal. If you have not placed a property under agreement yet, then only the RMCR fee of approximately $50-60 will be required. In the great majority of cases, we do NOT charge an application fee. Any fees that we ask you to pay us up front at application are actual amounts we must pay out for particular services.

You should receive a Truth In Lending statement and a Good Faith Estimate of closing costs and prepaid items you will pay. These are estimates only, but our best estimates at the time. As settlement nears, you will be able to get a final estimate that will be more accurate--excluding only items that may show up at the settlement table which we do not know about in advance (your attorney's fee, for example).

You will receive a booklet regarding settlement costs, a booklet about mortgage insurance (FHA loans) and various other papers that explain other aspects of the mortgage and the approval process. 

Your loan officer will photocopy your documents. Normally, you retain the originals and copies are acceptable to us. A few documents (the Agreement for Sale and your VA Certificate of Eligibility, for example) must be presented to us as originals. Click HERE for a list of documents you will need at the time of application.

Your loan office will give you a written list of items which you did not provide him at the time of application but will be required of you. 

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Processing and Underwriting

The next most asked questions relate to what the processing procedures consist of and how we qualify both the borrower and the property. Well, it is not all that complicated! The whole process is attempting to answer three questions.

1. CAN the borrower settle on and pay for the mortgage they want?

2. WILL the borrower pay for the mortgage they want?

3. Is the property worth what they borrower is agreeing to pay?

(By the way, we have no choice but to use the past and present, actions and activity, to predict the future. If you say, after reading what follows, "Who knows the future?" or "How can you be sure about that?"--all we can say is that we don't claim to be prophets or fortune-tellers. We follow the law, guidelines, common sense and a sense of fairness to come up with the best decision for both you and our company. If we are too conservative in granting loans, we will not be competitive or be able to stay in business. If we are the opposite, we will grant too many loans that go bad or are not profitable for one reason or another. So, we take a middle road and hope our knowledge, experience and good intentions yields the right answers to those questions more often than not.)  

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The Appraisal

Question 3 above, "Is the property worth it?", is answered by the appraisal. There are 3 appraisal methods: (1) Cost, (2) Income, (3) Market. In the same order, these appraisals place a value on a property by--(1) What would it cost to reproduce it? (2) How much income can it generate? (3) What have similar properties, in the same area, sold for recently? The first two methods are rarely used for single-family residential properties. The last one, the Market (a/k/a Market Data, Market Comparison or Market Value) method is generally used for those properties. Even in the instances where one of the other methods is used to value the improvements, the Market approach is still used to place a value on the underlying land.

In the Market Data approach, the appraiser usually locates at least 3 sales of properties that are similar to the property you want to buy. That is, similar in age, size, condition, construction and style. They should be in the same municipality and as close to the subject property as possible. The sale dates should be as recent as possible. Those similar, recently sold properties are called comparable sales or, simply, comparables or "comps". The appraiser must use care to eliminate "comps" that were not "arms length" transactions (such as a sale between relatives) and also duress sales (the buyer HAD to buy or the seller HAD to sell). Those sales don't necessarily reflect the real market. If the subject property is being sold with a mortgage contingency, an adjustment should be made for comparable sales that were for all cash.

Finally, the appraiser, using his knowledge and skills, adjusts the sales prices of the "comparable" sales for the differences between them and the subject property. For example, if a comparable property had a lot that was bigger than the subject property, the appraiser would adjust the comparable's price downward, etc. If the subject property has more bathrooms or a better street, the comparable's price would be adjusted upward, etc. After making all of the adjustments, the appraiser sets the estimated value of the subject property at the median value of the adjusted comparables. Note: that isn't the average of the comparables. Rather, it is the middle value. 

Is appraising a science? Absolutely not! There is a lot of skill and experience required to determine the amount of adjustments required to be able to compare properties that are not next to each and not identical. However, if you had a property appraised by a number of honest and skilled appraisers, you would find that all of the market values they came up with would probably be within 5%, up or down, of a particular value.  

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The Mortgage Processors Job

Processing a mortgage loan consists of gathering, arranging and pre-analyzing the mortgage documents in preparation for submitting the mortgage package to the Underwriter. The processor is a different person, or even location, than the underwriter, but they may make preliminary conclusions as to whether a particular borrower can and will pay for the loan they applied for.  Unfortunately, while we try to get all documentation we will need, it is usually impossible to guarantee that nothing else will be requested later.  Quite to the contrary, you can expect that, during the processing of your mortgage application, you will probably be asked for additional documents. You can help the process by anticipating that pay-stubs and bank statements must be less than 30 days old and submitting them, as received, until we tell you to stop!

Your Processor, primarily:

• Arranges the mortgage documents in a standard order

• Verifies that the documents you provided are what we need and ALL that we need

• Orders the Flood Certification and Appraisal and keeps after the appropriate parties until they are received--When they are received you will be notified if flood insurance is required, if the property value you needed was verified and if pre-settlement repairs are required. If repairs are needed and made, the processor will arrange for the appraiser to re-inspect the property.

• Verifies that you meet various mandated minimums and maximums in regard to income and debt and proposed debt and determines whether the ratios between income and debt meet the guidelines. 

• Determines whether you have the assets required to actually settle on the loan.

• Determines whether letters of explanation are required which must deal with past credit problems, credit inquiries, changes in income or job, etc., and makes a preliminary determines whether those letters which you provided will be acceptable to the underwriter.  

• NOTE: The processor will try to anticipate, on behalf of the underwriter, what additional or clarifying documentation the underwriter may request.  But, be prepared for the underwriter to ask for further documentation.  It doesn't always happen, but it is in the nature of the game to happen!

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Underwiting the Loan

It is difficult to explain underwriting without being an underwriter. But, as mentioned above, it is primarily meant to come to a conclusion, based on your past earnings/ credit performance and present situation as to whether you can afford and will pay for the loan you requested of us. There are volumes written on how to underwrite and volumes that cover the required standards and guidelines. If you have been rejected for a mortgage in the past, you might think that the underwriter's job is to reject as many loans as possible.  Nothing could be further from the truth.  Lenders are in the business of lending!  But they do not want loans to "go bad".  Contrary to popular opinion, the vast majority of lenders are not at all anxious for you to default so that they can take your property, sell it and make a profit.  

So, in general, underwriting is the process in which an underwriter actually determines whether a loan applicant should be given a loan. The underwriter is attempting to answer the following questions from the package of documents that the processor passes to underwriting department:

1. Is the mortgage which the borrowers want within their means to pay?
2. What is the borrowers' income and how stable is their employment?
3. What is the borrowers recent history regarding housing and housing expenses (rent or mortgage)?
4. What credit has already been extended to the borrowers and how have the borrowers handled it? 
5. What assets are available to the borrower to pay the cash requirements of the loan?
6. If there have been credit problems:

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Conclusions

Once you are carefully pre-qualified; have applied for a loan which is in your means to repay; have handled credit debt as we suggest; provided everything asked for, in a timely manner and in the detail we ask for; you are well on your way to being approved for your mortgage.

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