Applying for a Loan
Once you have negotiated a final purchase offer with the seller, you are ready to finalize the loan application process. Under RESPA (Real Estate Settlement Procedures Act), lenders are legally required to provide you with a good faith estimate within three days after receiving your application. The information gives you an estimate of your closing costs and monthly payments. This good faith estimate does not require lenders to provide a detailed breakdown of the closing cost items or to identify the persons responsible for the payments. Therefore, it is important for you to work with your real estate agent or attorney to understand all the closing cost fees. This will ensure that there are no unexpected expenses related to your final closing costs.
To apply for a loan, you will have to provide the lender with detailed documentation of your financial history. The lender will request a credit report from a credit agency and will verify the information provided in your loan application. Be prepared to give your lender:
- Social Security numbers for both you and any co-borrowers
- Copies of checking and savings accounts statements for the past six months
- Evidence of any other assets such as bonds, stocks, or money saved in retirement programs (i.e. 401k or 403b program)
- Recent paycheck stubs
- W-2 withholding forms, or income tax returns for the past two years to verify your income and proof of employment
- A list of all credit card accounts and the approximate amount you pay each month
- A list of account numbers and balances due on outstanding loans, such as car loans
- The name and address of someone who can verify your employment
- Residence history for the past two years
- Sales contract for the purchase of a new home
- Homeowner's association information with contact information if property is a condo or part of a homeowner's association
Criteria For Loan Applications
Lenders consider many things in deciding whether to extend a loan. Not all lenders use the same factors. But there are some common guidelines that lenders use when evaluating loan applications:
Capacity - Lenders will review your employment history to determine if you have the capacity to repay your debt obligations. How long have you been working at your current job? How much do you earn? What is your future earning potential?
Credit - Lenders will review your credit history, consider how much debt you have incurred, and how you manage your debt responsibilities. How much do you owe? Do you pay your monthly bills on time? Are you consistently late in paying bills?
Character - Lenders will look at how you pay your bills. They will also take into consideration any history of lawsuits or bankruptcies.
Collateral - Lenders will evaluate the value of the property, a source of protection for the money they lend. The lenders want a guaranty that they will get back the money they lend. Is the property worth the risk? What are the chances that the property will decrease in value?
Getting Your Loan Approved
Approval means that you have successfully qualified for the loan for which you applied. Having an approved loan application means you can begin the closing process on the house. You will receive a formal letter of approval, commonly called a commitment letter, from the lender that guarantees in writing that they will lend you a specific loan amount. It also details the conditions of the loan. The letter will address:
- The loan amount
- Loan program and type
- Term of loan (How many years you have to pay back the money)
- Annual interest rate
- Loan origination fee
- Points that may be applicable to the loan
- How long you have to complete the closing-related activities and transactions
- Other costs(neighborhood association dues, special assessments, etc.)
Reasons A Loan May Not Be Approved
There are several common reasons why lenders deny a loan application.
Poor credit report - A negative credit report generally indicates that the homebuyer has not established a good credit history. Your first step should be to verify that the credit information issued to the lender is accurate. Ask to see a copy of your credit report that the lender received, or obtain a copy of your credit report yourself from your local credit bureau.
Not enough income - Your ability to pay off a loan is reflected in your current earnings and your future income potential. Lenders may decline a loan if the homebuyer does not meet the income requirements or cannot show proof of stable income. It is to your advantage to establish a consistent and stable income.
Too much debt - If your existing debts (credit cards, car loans, student loans) exceed the debt-to-income ratio for the loan, determine if you can pay off some of your debts before you apply for a mortgage. If you have credit cards you don't use, cancel them. Inactive credit cards are still considered potential debt. For more assistance with debt consolidation or other credit needs, contact a HUD Housing Counseling agency.
Options If Your Loan Is Not Approved
A lender is required by law to explain in writing the reasons why your loan was not approved. An important thing to remember is that if the lender declines your loan application it does not necessarily mean that the purchase of a home is not in your future.
You still have some options available:
Consider another lender - You may want to research other lenders in your area. Fees and loan options vary by lender. You may be able to find another lender that offers more suitable loan packages or charges lower fees.
Increase your Down Payment - If you can increase your down payment, you will reduce the amount of money you have to borrow. This might help you qualify for the loan.