Scientists who study and measure human behavior find that buying a home is one of the most stressful experiences of our lives. Contributing significantly to this anxiety is waiting for the mortgage to be approved. Much of the homebuyers' unease results from not knowing what is going on. You do know credit checks and verifications of employment are taking place, but what makes the difference between getting or not getting that loan, and how long does it take? Hopefully, this page will help reduce some of that anxiety by detailing the steps the lender goes through in the decision-making process called "underwriting."

Just as wise stock market investors carefully research the companies in which they plan to buy stock, careful mortgage lenders investigate the borrowing profile of each loan applicant. In lending money to the prospective homebuyer, the lender assumes a long-term risk. The assumption is the borrower is going to eventually repay the loan, and in the meantime, make the loan payments on time.

Once all the information is collected and eligibility is established, the lender decides whether to extend the homebuyer credit. In other words, lenders analyze the risk of making the investment, and match it to an appropriate interest rate and loan term.

There are NO established, industry-wide standards for underwriting, though most lenders follow standards set by government-related agencies, private mortgage insurers, private mortgage investors or institutional investors. The vast majority of mortgage lenders attempt to approve a loan application, if at all possible. But, approving a loan that will become delinquent serves no one's best interest. So, the burden falls on the lender to establish that an applicant is qualified.

The Initial Interview
The process usually begins with a simple and brief conversation where the prospective borrowers and a representative or agent of the lender discuss the potential loan. Lenders do not require a face-to-face meeting, and interviews by phone are completely acceptable. Most lenders today, will preapprove you for a loan before you begin to shop for a home. Preapproval is something everything borrower should do before home shopping. Knowing approximately how much money you are qualified to borrow can save you time and prevent disappointment when you are looking at houses.

Some of what you'll need for getting a mortgage loan approved:
The Purchase contract for the house you're buying... as soon as you have one.
Bank account numbers and the address of your bank branch. This will save the lender time in checking your credit.
Pay stubs, W2 forms or other proof of employment and salary.
If you are self-employed, you should be able to present balance sheets, tax returns or bank statements and other information about your business.

The important document that gets the whole process rolling is the standard 1003 (Ten-O-Three) loan application. It asks questions concerning you, your income, assets and liabilities, your credit, and your legal history, as well as a description of the property you wish to buy. At Mortgage Match, a Senior Loan Consultant will complete this application for you.The lender will then verify the information you provide on the application, before making the decision whether to extend the loan.

Applicants usually will know after starting the preapproval process, if they are qualified for the type and size of loan they want... as well as the rates, costs and terms of the loan they want.

Other things to know...
The initial interview also starts a clock that will allow applicants to know whether or not they have been approved in about 30 to 60 days from the submission of a completed application. If the loan is denied, the lender must disclose the specific reason (s) for the rejection.

Is Your Income Sufficient?
Depending on how you're documenting your income, if at all, the first step the lender takes is to verify your employment or income. This is done by mailing employment and income forms to current and past employers (sometimes it done by phone as well), and it will help the lender determine how much debt you can successfully take on. For more on the ways income information can be supplied to the lender, please click here.

Income Requirements
A general rule is that you can qualify for a loan that's monthly repayment amount, plus taxes, hazard insurance and other fixed monthly consumer debt, are one-half your monthly gross income. Often, the amount you earn may not be as important as how you earn it. Bonuses and commissions can vary greatly from year to year, and lenders are reluctant to depend on them if they make up a large percentage of your income. There are similar problems when a large portion of your salary is based on overtime pay, and you rely on it to qualify for the loan. In the case of bonuses and commissions, the lender will want to verify your bonus and commission status back probably two years to get a better idea of what you earn from those sources on average. In the case of overtime, the lender will establish whether the work is expected to continue and whether or not the amount of overtime income is reasonable for the extra work. After establishing these points, the mortgage lender will make a decision as to how much to allow for these additional sources of income. If "prove-ability" of your income becomes a major issue, you may seek to qualify for a loan with "stated" income.

If you are self-employed, you should plan on producing a balance sheet, profit and loss statements, bank statements or copies of your federal income tax returns for the past two years. Tax returns may also be required to verify other income claims, such as when income from securities is a major source for mortgage payments.

Debt-To-Income (DTI) Ratio
Lenders use a set of general standards (income/expense ratios which show how much income is used for various expenses) to test the application for qualification. These standards are based on what experience shows a homeowner can spend to own the home, and also take care of other long-term financial obligations, though lenders use their own discretion in making the final decision.

Is Your Credit Good?
Before extending credit, lenders will want to examine the risk of not getting the money back. To do this lenders will look at four crucial aspects of your credit history when you apply for a mortgage: History of past credit - what were the size and terms of past loans?
Type of Credit - have you obtained real estate, auto, personal or other installment loans in the past?
Attitude toward credit - are active accounts current , and is there any recent bankruptcy or judgment?(usually in the past two years)

Lapses in employment or debt repayment - how many unexplained lapses are there, and for how long?
From the information uncovered by these four questions, lenders can develop a fair idea of just how you will handle your responsibilities once you have signed the contract for repaying the loan.

Credit Score
Mortgage lenders will pull a tri-merged credit report which shows what the three major credit bureaus have on your credit history. Each bureau, Experian, Equifax and Transunion "score" your credit. Despite the fact that each bureau has its own name for that score, it has popularly become known as the FICO score. It's rare or unusual that a borrower will receive the same score from any one of the bureaus. Usually, a borrower has three different scores. It is the standard in the mortgage industry to use... not the highest score, or the lowest score, but the score that's in the middle. It's the "midscore FICO" which is used to qualify a borrower for the loan for which he's applying. Not only will this score provide a basis for whether you can qualify for a loan at all... it will also be used to determine your interest rate, and any other guidelines a lender imposes on borrowers for their programs.

A consumer safeguard limiting the credit information lenders can use to make a mortgage decision is the Equal Credit Opportunity Act (ECOA). ECOA prohibits discrimination in lending based on race, color, national origin, sex, marital status, age (provided the applicant may legally contract), and the fact that all or part of the applicant's income comes from a public assistance program.

Can You Make A Down Payment?
Lenders would prefer homebuyers to have enough money available to make the down payment of between 10 and 20 percent of the asking price for the house. If however, you cannot come up with a down payment of any size, there are programs available which require NO or zero down payment. Borrowers should understand that higher interest rates will accompany no down payment loans, because the lender is assuming more risk when they're financing 100% of the purchase price.

Sources on which prospective homebuyers may draw for the down payment and the closing costs, include: savings, stocks/bonds, Individual Retirement Accounts (IRAs), pension funds, real state holdings, life insurance policies, mutual funds or employee savings plans.

Homebuyers may also rely on another source of funding for the down payment... a gift, or money given by a parent or other relative that need not be repaid. A person may give another person up to $10,000 per year without either party being taxed. A married couple, therefore, could give a child or spouse as much as $40,000 for a down payment tax-free. Remember, however, that if you use gift money for a down payment, you will need to present a letter stating so, and signed by both the giver(s) and the receiver( s) to your lender.

Mortgage lenders send a form to the homebuyer's bank or savings institution(s) to verify the amount available for purchasing the house, as well as the amount of outstanding loans with that institution, if any.

The Appraisal - Is The House You Are Buying Worth The Price?
Mortgage lenders also examine the real estate being purchased to make sure that, in case of foreclosure, the lender has a salable property. The property's acceptability is established by an independent field appraisal.

The appraiser looks not only at what the home is worth today, but how the neighborhood's dynamics will affect the property value in the future. The three main points the appraiser checks are: Physical security of the property: age, structural soundness, landscaping, etc.
Location: the kind of neighborhood, surrounding houses, access to transportation, commercial development nearby, etc.
Local government's plans for the area: how zoning and taxes will affect the property in the years to come.

Do I Get The Loan?
Your lender has made all the checks. Your income, credit, assets, property and all necessary documentation have been scrutinized. Now comes the decision.

If the lender's decision is to extend the credit, you will obviously be notified. The mortgage lender can approve the homebuyer for the entire amount asked for, or a lesser amount based on the borrower's qualifications. The commitment terms relating to interest rate and/or discount points may be firm at the time of commitment, or conditioned on the market rate at the time of closing. If the decision is not to extend the credit, the lender has 30 days from the acceptance of the completed application to notify the prospective homebuyer. This notification must also include the reason(s) for the rejection.

Hopefully, you feel a bit more at ease about what happens after you apply for a mortgage. If you have a good credit rating, it will speak for itself and will go a long way in getting you approved.

Certainly there will probably be some anxiety associated with applying for a mortgage, but if you understand the process, waiting for approval will be far less stressful.