The Mortgage Application Process

Applying for a home loan can be scary

What to expect

The mortgage application process requires considerable paperwork. First there is the application form, which asks for detailed information about you, your employment record, the house you want to purchase, etc. The lender will need documentation pertaining to your personal finances--your earnings, your monthly expenses, and your debts--to help gauge your willingness and ability to repay the mortgage.

Lenders also will examine your file at the credit bureau to learn if you pay your bills on time. A lender may reject your application if the report shows that you have a poor credit history. Thus, you may want to make sure your credit file is accurate before you apply for your mortgage. You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says. The names of credit bureaus can be found in the phone book.

You can prepare for questions about your financial condition by using the worksheets in this brochure. Worksheet 1 helps determine how much money you might have available for a monthly payment--just list all items of income and payments required on debts that won't be paid off within ten months. There's also a place for the estimated mortgage payment quoted by the lender.

To figure the mortgage payment, the lender will begin by asking how much you want to borrow. The maximum loan amount will be determined by the value of the property and your personal financial condition. To estimate the value of the property, the lender will ask a real estate appraiser to give an opinion about its value. The appraiser's opinion can be an important factor in determining whether you qualify for the size of mortgage you want. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and will expect a down payment making up the difference. If the appraisal is below the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value.

When looking at your projected mortgage payment and existing debt, some lenders might use ratios such as "28 and 36" to determine whether you qualify for the loan. These are commonly used ratios.

In the case of "28 and 36," the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application. Then use Worksheet 2 to calculate whether you are within the lender's guidelines.

Be prepared to provide certain documentation about your income (W2s for prior years and year-to-date pay stubs), current debts (account number, outstanding balance, and creditor's address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It's common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.

If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given--you may be able to find answers or alternatives that will satisfy the institution's lending standards. Even if that doesn't happen, understanding fully why the loan was denied may improve your chances with the next lender you visit. Factors that may affect the loan decision include:


Is your proposed down payment sufficient? If not, perhaps the lender offers other types of mortgages with lower down-payment requirements.


Is the size of the mortgage you need too high, given the property's appraised value? If similar houses in the neighborhood have sold at prices comparable to yours, maybe the appraiser undervalued the property. Suggest that the lender re-examine the appraisal. You also have the right to receive a copy of the appraisal if you have paid for it.

Credit history

Is the lender doubtful--because of your level of debt or credit history--about your ability to make the monthly payment? Ask how your debt ratios compare to the lender's standards. If there were special circumstances surrounding old credit problems, ask for a chance to explain.
Worksheet 1

Monthly Income (before taxes)

                                   Borrower     Co-Borrower     Total
Base employment
income                   $ _______     $ _______    $ _______
Overtime                     _______     _______     _______
Commissions               _______     _______     _______
Interest/dividends       _______     _______     _______
Other                           _______     _______     _______
Total monthly income                                   $ _______

Monthly Payments on Existing Obligations
Automobile loan     _______     _______     _______
Student loan            _______     _______     _______
Credit cards            _______     _______     _______
Alimony, etc.           _______     _______     _______
Other                      _______     _______     _______
Total monthly payments                        $ _______

Monthly Housing Expense for New Loan (ask lender)
Mortgage payment (principal & interest)     _______
Real estate taxes     _______
Insurance premiums     _______
Total monthly housing expense     $ _______
Worksheet 2
Take the dollar amounts from Worksheet 1 and:
For the housing expense ratio,
      Divide Total monthly housing expense by Total monthly income =     ___________
For the all debt payments ration,
      Divide (the sum of Total monthly payments and Total monthly housing expense) by Total monthly income =     ___________

Source: US Federal Reserve