Once the home mortgage loan application has been turned in, many applicants wonder what the lender will do with their application, and if there are any additional steps they should take while waiting for the lender’s decision. Here’s what typically takes place next in the approval process and a few things you can do to help speed things up.
The Mortgage Loan Underwriting Process
After receiving all the required loan application documents for the purchase of real estate using a home loan, the mortgage lender will begin to review them and assess if the risk associated with a loan is in line with their lending standards. This is a process known as underwriting. The lender will look at what is referred to in the industry as the three Cs of mortgage underwriting: credit, capacity, and collateral.
The Three Cs of Mortgage Underwriting
Credit
Credit plays a major role in a lender’s determination of a mortgage applicant’s risk. By reviewing the credit report and score of the individual, couple, or business, the lender will make an educated estimate of the probability of being fully repaid on the loan.
Capacity
Next, the lender reviews the applicant’s capacity to repay. This is assessed by reviewing the W2 forms or pay stubs, employment history, recent bank statements, as well as current debts and assets of the borrower.
The lender then evaluates the debt obligations the borrower already has and compares that to the proposed monthly mortgage payments in relation to the income the borrower receives. This helps the lender determine what the borrower’s debt-to-income ratio is now and what it will be after receiving the loan to feel comfortable they will be able to handle repayment of the loan.
Collateral
The collateral refers to the real estate for which the mortgage is issued, including both the structure and land. The lender looks at the current value of the property, its proposed use, as well as the current trends in the housing market. Then they approximate the value they could receive if they were forced to foreclose on it in the event of a default. This amount is compared to the total amount loaned and is included in the overall risk assessment of the borrower and property to be purchased.
After reviewing the three Cs, the lender will have a good understanding of the applicant and whether the loan is appropriate for it to service, given the risk profile of the borrower and the real estate involved.
Home Inspection
While the lender is underwriting the home mortgage loan, there are things that an applicant can do. The first of which is obtaining a home inspection. A home inspection is included in most purchase and sale agreements and is used to determine the overall structural condition of the home.
An inspector will review the major components of the house, condo, or another type of real estate, including the roof, HVAC system, basement, plumbing, electrical, etc., to look for proper condition and building practices.
The home inspection is best done after agreeing upon the purchase price and other terms, but prior to signing the final documents so that you can ask the seller to pay for major repairs or cancel the agreement if there are major issues that arise.
Typically, an adequate home inspection will run between $300 and $750 and takes a couple of hours to complete. However, a full written report may not be available for a day or two. You and your real estate agent should try to be there during the inspection process so it’s easier for the inspector to show and explain things to you if needed.
Mortgage Application Denied?
A fear of many applicants, especially first-time homebuyers, is getting denied a home mortgage loan. Although the possibility is there, the chances of such an event are low if applicants fully understand the qualification requirements before applying, and carefully select a good mortgage lender and loan type for their financial situation.
That being said, if the event does occur, there are steps to take which will help in future circumstances:
1. Find Out Why You Were Denied
The lender is required to inform you of the rationale behind their decision within 30 days of issuing the denial. This response is called an adverse action notice. The most common reasons issued from the lender correlate to the three Cs outlined above: poor credit, insufficient down payment, and excessive current debt. Looking forward, all of these are curable and can be remedied before a new application is submitted.
2. Request a Second Opinion From the Same Company
Some lenders will entertain a second review of your case if you can present something which has changed since the original application was submitted. Have you paid down a credit card or removed an incorrect account from your credit report? Let the lender know of any updates to your situation and ask them to reevaluate you.
3. Keep Shopping for a Mortgage Lender That Can Better Serve You
A third option is to keep shopping for lenders who might be able to better serve your needs. Not all lenders have the same underwriting standards or metrics. Just because your financial situation doesn’t match the first lender’s criteria, that does not mean it won’t match the next lender’s requirements.
Next Up – Closing on the Property
If you are fully approved for a mortgage and are now moving further towards closing, it’s important to understand what takes place when you sign your final closing documents.
