The first step potential homeowners encounter will be the mortgage application form, more commonly known in the industry as the “1003”. This form requires the borrower and their spouse to provide employment and wage information, data about the potential home being purchased, and debt obligations. Lenders will also request documentation to back up the information provided on the mortgage application and request a copy of the borrower’s credit report, at this time.
During this preliminary stage, the mortgage banker, broker or lender is assessing the borrower’s financial stability and capability to repay the mortgage loan if granted. Credit score, deposit reserves and outstanding credit obligations will all play into this evaluation period. If a borrower’s credit score is too low or if they do not have enough funds for the down payment, closing costs and reserve account their application may be turned down or the lender may require additional documentation regarding any red flag that may have risen. Once a borrower has passed this phase they are considered “pre-approved”.
Borrowers should make sure their financial house is in order before making application. Since a borrower’s credit report is of primary concern during this phase, obtaining and examining one’s credit report and paying off any unnecessary debt are great preliminary steps to follow prior to application.
Loan Amount and Debt Ratios
Based on the information obtained during the pre-approval process, the lender will determine what size payment a borrower will qualify for which in turn determines the maximum loan amount for the purchase.
The loan amount the borrower will be looking to obtain will generally be the purchase price of the home, less the down payment. Down payment requirements vary depending on the type of loan being applied for. Government backed loans (VA and FHA) are generally the lowest between three and five percent of the purchase price, conventional loans can be 10-20 percent and higher.
Mortgage lenders rely heavily on a borrower’s debt to income ratio (DTI) when determining loan approval and terms. It is usually seen as a fraction, where the first number is the total mortgage payment expense (principal, interest, taxes and insurance) and the second is the borrower’s total debt (mortgage payment, car payments, credit cards, student loans and all other revolving and installment loan payments combined). Ratio requirements vary by lender and may also affect the borrower’s interest rate. For example:
Mortgage Payment Expense to Effective Income
Total mortgage payment (principal, interest, taxes and insurance) $1,165.00
Borrower’s gross monthly income (including co-borrower) $4,550.00
Debt to income ratio (divide total mortgage payment by gross income) 25.6%
Fixed Payment Expense to Effective Income
Total mortgage payment (principal, interest, taxes and insurance) $1,165.00
Total installment payments (auto loans, student loans, etc.) $ 456.00
Total revolving payments (credit cards) $ 175.00
Total amount of monthly debt $1,796.00
Borrower’s gross monthly income (including co-borrower) $4,550.00
Debt to income ratio (divide total mortgage payment by gross income) 39.47%
Property Appraisal
Lenders will usually lend to the borrower a predetermined percentage of the appraised value of the home or property they are looking to purchase. The difference between the loan amount and purchase price determines the borrower’s required down payment. During the pre-approval process, fair market value can be run to obtain a preliminary approval. Final approval will require a property appraisal or opinion of value certified by a licensed property appraiser.
If the appraisal is below the asking price of the home, the amount of the down payment and the approved loan amount may not cover the purchase price. In these cases the lender may suggest a larger down payment or the borrower may ask the seller to lower the purchase price.
The mortgage loan process can take 30 to 60 days, sometimes longer depending on the market and each individual borrower’s circumstances. Potential homebuyers are encouraged to being this application process early on in their search for the perfect home. The entire home buying experience will be much more enjoyable if financing is in place.
Katrina Rief-Derrico - Katrina has over 19 years experience in the housing industry and is forever the student. Holistic health and wellness is her passion.
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