Mortgage Application 101

By Greg Farwell
Special to the Herald

January 12, 2009 09:53 am

— Whether you are buying a home or refinancing an existing home loan, there are a few things you can do to ensure a smooth loan application process and a solid loan approval.
Things have certainly changed in mortgage lending in the last 12 months, but the application process really has not. It’s as easy as it’s ever been to apply for a mortgage loan, and with these tips below you will apply with confidence.
The Four C’s
First, let’s talk about a few important points lenders look at for qualification purposes, known as The Four C’s.
1. Capacity
This is also known as income. It refers to the adequacy of the borrower’s income to pay the principal and interest due on the loan, plus property taxes and homeowner’s insurance (PITI).
2. Character
This refers to the borrower’s current and previous record of paying debts and paying them on time, as evidenced by a credit report and credit score (fico). If you want to check your own credit report from all three credit reporting agencies, you can do so at www.annualcreditreport.com, or call 1-877-322-8228. This central site allows you to request a free credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.
AnnualCreditReport.com is the official site to help consumers obtain their free credit report.
3. Capital
Refers to your down payment if you are purchasing a home, or equity, if you are refinancing your home.
4. Collateral
Refers to the safety and soundness of the home and the value of the home as determined by an appraisal done by a licensed real estate appraiser. This helps the lender determine the loan-to-value (LTV).
Each of these four points does not necessarily weigh equally, and a weakness in one may be balanced or overcome by strength in another. The important thing is to discuss any potential deficiencies with your loan officer at the time of application to determine if they would pose a problem.
Paperwork
Paperwork is an important part of the application process. Sometimes it may sound like a lot of work and signatures, but relative to the amount of money being lent, it is really not a burden. If at all possible, provide this information at times of application. It will make the approval process go much faster and eliminate any questions or red flags up front. Always call your loan officer with any questions.
Typical minimum required paperwork:
• One month of paycheck stubs with year-to-date income
• Two years of W2 forms
• Two months of bank account statements
• Recent copy of any of the following: Retirement/401K/IRA/mutual funds account
• If you are self-employed or earn more than 25 percent of your income from commissions, bonuses or rental income, you will need to provide your most recent two years signed federal income tax returns, including all schedules and all pages
• If you are divorced, the lender will want a copy of your settlement to determine how much alimony or child support you are obligated to pay or are entitled to receive, and the duration of those payments
• If you have filed for bankruptcy within the last seven years, you will need to show your bankruptcy papers.
Pre-approval
If you are thinking of purchasing a new home, always visit with your mortgage lender to apply for a mortgage loan first before looking at new homes. We are fortunate in our local community that we know our customers, and in many cases have worked with them for years. However, don’t assume you know you will qualify for the home or loan you want. Everyone’s situation is different and changes from year to year, not to mention mortgage underwriting guidelines frequently change as well. Having a solid pre-approval in place also helps in the negotiation process because sellers and real estate agents know you are serious. Often offers from those that are pre-approved are entertained before those without pre-approvals. Home buying is stressful enough, have a pre-approval in place first.
Things not to do after application
Well-qualified borrowers can sometimes slow down the loan process or jeopardize their approval by making changes to their financial position after an application is submitted and approved.
Don’t increase your debt load or make changes to your credit
Buying a new home is an exciting time. Don’t make the mistake of buying new furniture, home improvement items, new cars, etc. before loan closing.
Credit reports may be re-pulled before closing, and you may find you no longer qualify for the loan. It will at least slow down the process and create more paperwork. Also, don’t transfer credit card balances or open any new accounts.
This may cause changes in the fico score, even though temporarily. The same information applies if you are refinancing your mortgage loan.
Not providing or delaying requested documents
Documentation may seem like a hassle, but considering the amount of money involved (six figures in many cases), it is not a hassle and is a required part of the mortgage lending process.
Not providing all documents requested, or delaying the return, may be a sign of a red flag. At minimum, it slows down your approval. Provide as much documentation as soon as possible upfront so your application can be processed and therefore approved quickly. Put yourself in a position to negotiate the best sales price and lock in the best interest rate.
Don’t change your employment
Lenders re-verify employment before closing. A change in jobs could jeopardize a loan approval. Upward movement in position and/or pay with no gaps in employment will not usually cause a problem.
Don’t skip your mortgage payment or other bills
Always continue to make your current mortgage payment and pay all other bills on time.
Sometimes closing dates get changed or delayed, or your refinance may take longer than you expect during busy times.
As mentioned earlier, sometimes credit reports are re-pulled before closing, and late payments could change your approval status.
With this information, you'll now apply for your mortgage loan with the knowledge and confidence that you did everything you could to make the lending process as smooth as possible.

Greg Farwell is employed with Citizens First Bank.