Application loan
Once a buyer has compared loan costs and selected a lender, the next step is applying for the loan. The buyer fills out an application loan form and provides the lender with supporting documentation. The application loan form is then submitted to the lenders underwriting department, which evaluates the application loan form and ultimately approves or rejects the proposed loan.
Traditionally, buyers would first find the house that they wanted and then apply for a loan. In recent years, however, getting pre-approved, a prospective buyer submits an application loan to a lender before starting a house hunt. If the lender approves the application, the buyer is pre-approved for a specified maximum loan amount.
Pre-approval lets the buyer know in advance, before shopping, just how expensive a house he or she can afford. If a house meets the lenders standards and is in the established price range, the buyer will be able to buy it. This spares the buyer the disappointment of initially choosing a house that turns out to be too expensive and having the loan request turned down. Pre-approval also helps streamline the closing process once the buyer has found the right house.
A mortgage application loan form asks the prospective borrower for detailed information about his or her finances. The lender requires this information because it wants its loans to be profitable investments. A loan is unlikely to be profitable if the borrower does not have the financial resources to make the payments reliably, or if the borrower has a habit of defaulting on debts. The application helps the lender identify and turn down potential borrowers who are likely to create collection problems.
Most mortgage lenders use a standard residential application loan form developed by Fannie Mae and Freddie Mac. The application loan form requires all of the information, which is given below:
In addition to basic information such as address and social security number, loan applicants must also supply certain personal information that has some bearing on their financial condition. This includes the applicants age, education, marital status, and number of dependents.
The applicant is asked how much he or she currently spends on housing. This will be applicants monthly rent or monthly house payment. In addition to principal and interest, the house payment would include property taxes, homeowners insurance, any mortgage insurance, and any homeowners association dues.
The application loan form asks the name of the applicants current employer, what type of business it is, the applicants position and title, and how many years the applicant has spent at that job and in that line of work. If the applicant has been with his or her current employer for less than two years, information about previous employment is required.
A loan applicant should list all of his or her sources of income. About employment income, this includes not only the applicants salary or wages, but also bonuses and commissions. Dividends, interest, pension payments, and income from any other sources is listed as well. The lender will verify the applicants employment income by contacting the employer, and will require the applicant to submit documentation of other income sources along with the application.
The application loan form calls for a list of the applicants assets, which may include money in bank accounts, stocks and bonds, life insurance, real estate, retirement funds, automobiles, and other personal property. The applicant must also list liabilities, which may include credit card debts, car loans, real estate loans, alimony or child support payments, and unpaid taxes. The lender will verify the applicants asset and liability information.
Once the application loan is submitted and the information has been verified, the loan is ready for underwriting. Loan underwriting is the process of evaluating both the applicant and the property he or she wants to buy to determine whether they meet the lenders minimum standards. The person who conducts the evaluation is called a loan underwriter or credit underwriter.
In theory, a lender is free to set its own underwriting standards, taking virtually any risks it likes. In practice, however, most lenders apply standards set by the major secondary market agencies.
In evaluating a loan applicants financial situation, an underwriter must consider many factors. These factors fall into three main groups: income, net worth, and credit history.
A primary consideration for the underwriter is whether the loan applicants monthly income is enough to cover the proposed monthly mortgage payment in addition to the entire applicants other expenses. Therefore, the underwriter needs to determine how much income the applicant has.
Not all income is equal in an underwriters eyes, however. To be taken into account in deciding whether the applicant qualifies for the loan, the income must meet standards of quality and durability. In other words, it must be from a dependable source, such as an established business, and it must be likely to continue for some time. Income that meets the tests of quality and durability is generally referred to as the loan applicants stable monthly income.
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