Steps to successful mortgage approval
Many homebuyers often find themselves somewhat bewildered by the loan approval process, and even seasoned real estate investors often find the process somewhat overwhelming.
Everyone, it seems, knows someone who went through a nightmare approval process, and also someone who seemingly did it in their sleep. The reality should be somewhere in between.
There are some basic steps involved in all loan approvals, and some things that borrowers can do to either make it easy or tough on themselves.
One of the best things you can do is sit down with your chosen lender before you have written a contract on a property and go through a pre-qualification process. This involves filling out a loan application, supplying your lender with whatever verification of income and assets he may request and discussing any credit issues that may arise from the lender’s review of your credit reports.
The lender can then tell you what loan amount you likely qualify for and you can keep your house-hunting within your budget. Keep in mind that the approval will still be subject to the lender accepting the appraised value of the property you decide on, and subject to re-verification of the information used in the original decision. Also, don’t assume that just because you’re pre-approved for a $250,000 that the lender will automatically go to $255,000. They might or might not.
Once you have a contract on the property you will note there are a series of dates on the contract that you and the seller are required to meet. These are numerous, but the ones that should concern you in regard to a loan approval are the appraisal deadline and the loan approval deadline.
The appraisal date is when your lender must have an appraisal completed. Your lender orders the appraisal, even though you pay for it. If the property appraises for less than the contract amount, the lender may want to lower the amount of money he will lend on it. But these days there may be few if any comparable properties out there. If the comparables are not acceptable to the lender, they may still decline your loan if the value is not clearly justified on the appraisal.
The loan approval date is the date by which your lender must be ready to issue an approval. If you fail to notify the seller by this date that you do not have loan approval, you are generally obligated to buy the property or lose your earnest money deposit.
Getting to that loan approval involves not only the pre-qualification stage and the appraisal but supplying the loan officer you are dealing with the information he requests. This may include tax returns, W-2’s, pay stubs, brokerage statements and letters of explanation for previous inquiries or late payments. Getting this information in a timely manner will make everyone’s job easier.
The loan officer then assembles all the information (often more than 100 pages) and submits it to “underwriting.” The underwriters generally work for the company the loan officer plans to sell the loan to. These companies, known as “investors,” will decide if the loan package meets their criteria. If so, they will issue an approval and agree to fund and buy the loan at the time of closing. Most loan officers have numerous investors they deal with, and each investor has different programs and guidelines as to the type of loan they will make and the rate they will offer.
It is important to decide up front what type of loan you will want and the loan amount because your loan officer will consult his guidelines from the individual lenders he represents to determine their requirements before telling you that you are qualified for a particular loan. Sometimes it won’t make any difference, but other times it might.
Underwriters have fairly broad powers of discretion in asking for more information than originally anticipated, and unless the requests get unreasonable it’s usually not worth the aggravation to fight it. Generally it is because the underwriter is generally trying to justify an approval. We also have seen cases where underwriters have just had, or are expecting, an audit from the government or internally and they really can’t be lax on documentation.
Once the underwriter issues their approval, it may contain various conditions that may be major or minor. Your loan officer will tell you what these are, and work with you to satisfy them. There are generally “prior to docs” conditions and “at closing” conditions. Prior to docs means those items that must be satisfied prior to drawing the loan documents. Prior to closing conditions are generally minor and may be satisfied at the closing table.
Chris Neuswanger may be reached at Macro Financial Group in Avon at 970-748-0342. He welcomes mortgage-related inquiries from readers.