Step 1: Talk with a loan officer.
Your first and probably only contact with your lender is your loan officer, the salesperson who takes your application. When you first meet, the questions on your mind are likely to be, "Do I qualify for a loan?" and "How much can I borrow?"
Do you qualify or don't you? The loan officer has only your word to go on at this point, so don't expect to get an ironclad approval. Not yet. The answers you'll get at this stage will be versions of, "It depends."
The loan officer might say, "If what you've told me about your income, credit score and debts all checks out, yes, you'll qualify for a loan. Let's submit the application and find out." Or you might hear, "It looks like you'll qualify, but for less money than you're hoping for." Or, "You're probably not eligible right now, but your chances would improve if you save up a larger down payment or pay off your car loan."
At this stage you can be "preapproved" and get an estimate — not a promise — of how much you can borrow.
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If you're refinancing, your application is ready for the next stage of the process. If you're buying, you may not be able to get a good faith estimate (GFE) and a preapproval without choosing a home to buy, because the home, too, must pass muster. The bank needs to know what it's worth and what shape it's in. After all, if you default, the bank will become the owner.
It's a good idea to apply before house hunting, with one or several lenders. That way, the process can move quickly when you find a home.
Step 2: Fill out your application.
Here's where your real work begins. You answer the questions in the borrower information sections (Sections III, IV, V and VI) of the Uniform Residential Loan Application. (All lenders use the same form. It's here, at FannieMae.com.) It asks your name, address and Social Security number, housing and employment history, income and housing expenses, assets and debts. Your loan officer can help you with some questions, but you'll need to take it home to add up your monthly expenses and find documents such as old W2 forms, tax records, 401(k) and IRA documents, bank statements and addresses of old employers.
Step 3: Submit your application.
When you hand your application to a loan officer, the clock starts ticking. Within three days, the lender must give you a packet of "disclosures" including:
The lender's offer is conditional. The information on your application has to check out.
After you submit the application, the loan officer passes it to the operations department, the guts of the operation, usually hidden from public view in cubicles or even in offices in other states.
If you're working with a mortgage broker, your broker now submits your application to one or more lenders and they take over.
Next, your application goes under the microscope for review by two kinds of banking professionals, loan processors and underwriters.
Step 4: Processors give your application the third degree
Processing is a strange term; it sounds more like sausage making than banking. The processing team double-checks your file to make sure it's complete and true.
Processors look for errors, misinformation, discrepancies and hidden flaws that could make you a risky candidate for a loan. They check the liabilities you listed against those on your credit report. They scan your credit history for bankruptcies, foreclosures or a history of bills in collection, all likely deal killers.
Your income is scrutinized, too. Processors ask your employer to confirm that you're actively employed, and they obtain your tax filings from the IRS to compare them with your mortgage application.
They also search for debts you may not have disclosed, contacting courts and lawyers to confirm whether you are married or divorced and if you owe child support, alimony or a court-awarded judgment. "On a pay stub you'll sometimes see a loan, child support, garnishments -- it's amazing the things that may be payroll deducted," says Scarlett Miller, director of underwriting for Columbus, Ohio-based Residential Finance Corp.
Credit reporting agencies will tell the lender if, after applying for the mortgage, you take on a new loan or credit card. "That could disqualify the borrower for a mortgage," she says.
Your down payment gets the once-over, too. The lender wants to know it's really your money and not a recent credit-card advance or a loan from a friend or relative in disguise, since your overall debt level is a big factor in the approval of your application.
The processor engages title-company professionals to search for hidden claims, liens and loans attached to the property to ensure that the title on the home you want to buy is free and clear. (Maybe your application says — correctly — that you're unmarried, but a loan processor finds that you used to be married. The processor may need to take a detour to ensure you don't owe undisclosed child support.)
If you're buying a condo, the processor must also confirm that no more than 15% of the homeowners association members are behind on their dues and that fewer than 49% of the units are rentals -- requirements of the giant government-sponsored companies that buy and guarantee mortgages from lenders.
Step 5: The underwriter makes the decision
You'd think your application would be home free once the processing is done. But there's one final hurdle: underwriting.
The underwriter weighs the risk of lending money to you and decides if it's in the lender's interest. The underwriter may already be familiar with your application. To speed things along, processors often consult with the underwriting department. The idea is that it helps the underwriter anticipate what he will need to make a judgment.