The Application Process
Since the “application” is at the heart of real estate financing, the process of the application has an extremely broad reach. This will be a general overview of the loan process. This is long answer, but you will find it to be one of the most comprehensive and accurate descriptions of the general
Loan process. If you learn and internalize the following paragraphs you will know more than many mortgage brokers and thus be able to more effectively secure the best available mortgages with the least amount of anxiety.
Whether it is by telephone, face to face, by mail, or electronically, the actual
Uniform Residential Loan Application, or URLA / 1003 (the industry says this as “ten oh three”) is a standardized form that provides a loan originator with information necessary to determine your qualifications for a mortgage and to continue to process of securing financing.
As such, the process will almost always begin with you providing the information on the 1003. See the full version here: Interactive 1003.
Though the five pages of this form can seem like a large amount of information, here is a recap of the most important aspects:
- Identifying information for yourself such as addresses, birthdays SSNs, marital status, etc…
- Identifying information for the property such as address, year built, number of units, property type, etc…
- Type of loan requested such as amortization term (such as 30 years), amortization type (such as interest only or fixed), interest rate and occupancy (such as owner occupied, 2nd home, or investment property).
- Income information for yourself such as employment data, social security, rental income, dividends, child support, etc…
- Debt information for yourself such as all liabilities on your credit report, alimony, child support, etc…
- Asset information for yourself such as deposit, bank account info, investments, retirement funds, vehicles, possessions, etc…
- Details on any other real estate owned which gives income, asset, and debt information as it relates to properties instead of your person.
- Declarations regarding various aspects of your legal history and your race and ethnicity.
- Several places for you to sign and initial the application (if you are doing it over the phone, an application will be mailed to you).
Once a loan originator has all of the above information (or even some of it), he or she can begin the process of verifying it and requesting ancillary documentation required to secure financing.
For example, you will have made statements regarding your income on the application. In most cases, this will need to be verified. Many methods exist including W2’s, paystubs, and verification of employment forms.
Similar measures exist for verifying other portions of the application such as appraisals for the home’s info, bank statements for asset info, credit reports for liability info, and so on and so forth.
Automated Underwriting System (AUS)
Depending on the loan program, this info might be collected before your loan is submitted to an underwriter (basically a person or computer program that makes a decision on your loan), after, or not at all. For instance, there are AUS’s, or Automated Underwriting Systems. The most common are those offered by Fannie Mae (FNMA or the Federal National Mortgage Association) and Freddie Mac (FHLMC or the Federal Home Loan Mortgage Corporation). These are DU (desktop underwriter) and LP (loan prospector) respectively.
Fannie and Freddie are non-government, for-profit, corporations that are Sponsored and Chartered by the government for the purpose of setting uniform standards for mortgage loans. As the largest entities that create mortgage guidelines, their AUS’s are used by any mortgage provider that will originate or service loans based on those guidelines (this is known as conventional conforming lending. In other words, the loan “conforms” to Fannie and Freddie guidelines, thus is eligible for the best possible rates).
So after you have provided your application information to a mortgage originator, and before that information has been approved by the company that will finance your mortgage, it often passes through an AUS. The AUS generates an “automated approval” based on the information you provide. This approval will have conditions that need to be met in much the same way we discussed an originator needing to verify your documentation. The only difference is that, if the AUS perceives strength in certain areas of the application, it may waive the verification requirements for other areas.
For instance, it’s not uncommon for a loan with a large amount of money down and for borrowers with excellent credit histories to waive the verification of income and assets. In other words, all the AUS (and thus the lender) want to prove is that the home is worth the anticipated value, and from there, if you can show the claimed equity, either in the form of a down payment, or existing equity in a refinance, then the lender will not need to verify your claimed income and assets. The purpose of this is to streamline the application process in those situations where other factors of the application tell enough of the story for the AUS to “feel good” about your risk level.
The 4 C’s of Credit
Remember, that everything in the loan origination industry, whether it is small residential properties or multi-million dollar comes back to the same factors. Some call these The 4 C’s. They can be allocated to more than 4 categories and some give them different names, but the principles here are overriding. And the stronger any one of them, the weaker the others can be. It is a proprietary assessment of these items that the AUS’s (and good human underwriters) use to generate your approval.
- Collateral. This is the value of a non liquid asset, or simply, the home in question. In the mortgage industry, this is usually the lesser of the appraised value or the purchase price of the subject property. In some cases other properties can be used as collateral.’
- Capacity. This is the dual consideration of income versus liabilities. Income can be generated by you or by the property. Either way, provable income must be enough to service (pay for) the liabilities (debt) owed by you and created by the property.’
- Character. Simply put, this is your credit profile. It shows your character with respect to how you historically pay back debt. Other factors here include your stability in your residence, the stability of your income, or if doing project based or commercial financing, your previous experience and success with similar projects.’
- Capital. Simply put, money. Money talks. If you have access to significant amounts of money in the form of “liquid assets” such as checking, savings, retirement, stocks, bonds, etc… you are showing yourself as being in a strong position to support this transaction should the other factors become weak (such as value of assets decreasing, losing your job, missing credit payments, etc…)
All this to say that depending on the assessment of those factors, you may not be required to furnish the complete list of documents that most mortgages require. Here is that standard list of documents and that must be obtained before your loan can be funded by a lender.
- Something to document the value of the “Collateral” (the home) such as an appraisal.
- Something to document the income such as paystubs, verification of employment forms, or tax returns.
- Something to document your debt, such as a credit report, so that your “Capacity”can be assessed by considering income versus debt.
[Lenders are looking for an ideal ratio of debt payments to gross monthly income (can be as high as 67%, but is preferred at 40% or under). For instance, even if you only take home $3000 a month, but your gross income is $4000 per month, your “debt to income,” or DTI would be 50% if you had a $1000 mortgage and other debts of $1000 per month. This DOES NOT account for non-debt living expenses.]
- A credit report, which is used to review your historical success with debt and used in conjunction with your income, employment, and residency history already provided on your application to compose the “Character” assessment.
- A Preliminary Title Report, or “Prelim” will need to be ordered by the loan originator. This document specifies the conditions under which the title of the property can be legally transferred. This report is basically insurance for the already valued “Collateral.” If the property could not be transferred as the buyer and seller expect, the “Collateral” would thus be of less value.
- A VOD (verification of deposit), or account statements to verify your assets, previously discussed as “Capital.”
- A completely signed package including the loan application and other disclosures. The application is the same application that we’ve been talking about. The lender wants you to sign it because they will be “taking your word” for many of the claims you make. This falls into the category of “Character.”The disclosures are the other “C” of “Compliance.” Regulatory agencies require that numerous disclosures be provided and signed in order for the mortgage to be originated legally.
- An “Insurance Binder” will be ordered from an agent of your choice to document that the collateral will be insured.
Any of these documents that are not waived by the AUS (remember Automated Underwriting System), will be packaged together in the required format and sent either via mail, fax, or electronically to the lender that will fund your loan. The lender will review the provided documentation and ensure it was completely correctly.
If the lender’s human underwriters feel that there should be additional support for the provided documentation, they will notify your originator of those requirements via the CLA or Conditional Loan Approval. The CLA is the lender’s formal agreement to fund your loan based on the conditions requested. There are normally only 2 types of conditions, those required “Prior To Documents” (or PTD’s) being sent from the lender to the company that will facilitate closing (such as an escrow company or real estate attorney), and those that are required “Prior to Funding” the loan or “PTF’s.”
Your originator will communicate any PTD’s with you. For instance, you might have sent in the first page of your bank statements, but the lender’s UW felt it would be more thorough for the file to include all pages. This would then become a PTD. There are also PTD’s you might not be aware of. For instance if the lender requires a clarification on the appraisal, your loan originator can simply contact the appraiser to get this. This is important because you should be aware that there can be a lot of “behind the scenes” work even if you have provided all your required items quickly.
Once the underwriter receives all the PTD’s they can “sign them off,” which basically means they have been satisfied. Now your file is “ready for docs,” meaning that your loan originator can request that closing documents be generated and sent to the settlement company (escrow co., etc…). When Docs reach to settlement agent, you can then go and sign. Some refer to this as “closing” although your loan is not closed until the lender sends out the check.
In most states, 1-4 days will elapse between the time you sign closing documents and the time when the lender actually sends the wire transfer of your loan amount to the settlement agent. In other states, the lender collects all their required conditions up front and the funds will actually be dispersed the same day as you sign. These are known as “wet states” as the ink on your documents is still wet when the loan is truly closed. In “dry states,” you and the originator may have one or two items to get to the lender, in addition to the signed closing package, before they approve the wire transfer, this the ink will be “dry.”
At this point the loan is “funded” and “closed.” You will get your keys if you haven’t already, and the settlement agent will disperse monies wherever they are owed. For instance, if you are refinancing, your previous lender will be paid off, any debts you chose to pay off will be paid, and you will receive the difference.
Though there are many other conditions and considerations that can arise during the loan application process (such as dealing with bankruptcy, divorce, LLC, trust, or business documentation), this is an incredibly thorough primer on the topic of mortgage applications.
If you feel the question was not 100% answered for any reason, please contact me ASAP and I will amend this answer to address your concerns.