Part Two of the Loan Process
Once the application is complete with the assistance of a mortgage broker, the applicant will be given a list of items that will comprise a loan application package. In addition, certain disclosures to the applicant are required.
A loan application package consists of a properly completed application form and the supporting documentation required to process the loan and to make a credit decision. During the loan process, the lender typically uses a series of checklists to ensure each of the required steps properly occurred and the necessary documentation and support information has been gathered to approve and to close the loan requested (the loan for which the applicants applied). The loan processing checklists often include:
1. A Compliance Checklist;
2. A Stack Order;
3. A Borrower Checklist; and,
4. A Property Checklist.
1. Purpose of the loan. The three common categories of loan purpose include (a) purchase, either for occupancy or investment; (b) refinance, either to obtain a better loan rate and terms, or to receive a “cash-out”; or (c) an equity loan to obtain financing for home improvement or other described financial needs or objectives.
2. Source of Repayment. Typically, the primary source of repayment will be from the combined income received through the employment or professional activities of the applicants. Most lenders look for a minimum of 2 years in the same line of work or professional pursuit. In some instances, the source of income is through self-employment, from either a business or professional activity.
3. The applicant (consumer/borrower) may also present investment income as the source of repayment.
4. Assets. The asset breakdown represents the strength and composition of the financial standing of the applicants. It is also an indication of the applicants’ ability to save. Equity in other real estate, businesses, investments, or insurance policies also serves to demonstrate the applicants’ overall substance.
5. Liabilities. Liabilities represent the applicants’ leverage/debt against assets and the financial obligations that result in monthly payments, referred to as expenses. These expenses are usually broken into two categories, defined as the monthly housing expenses , and the total monthly obligations. The monthly housing expenses include the required monthly loan debt service, the debt service on any other financing against the security property, property taxes, assessments, causality and hazard insurance premiums, mortgage insurance premiums, and the dues or assessments of homeowners associations. The total monthly obligations include housing expenses and additional monthly debt service such as long-term contractual installment debt (vehicle or furniture payments), revolving debt such as credit card payments and open accounts, spousal and child support, and other liabilities that require monthly payments. The foregoing currently does not include when underwriting conventional loans or alternative mortgages or non-traditional loan products, utilities or the maintenance of the property (unless the loan product is FHA insured or VA indemnified).
6. Credit History. Each lender sets general policy guidelines outlining acceptable credit quality. These policies typically include loan terms that are predicated on different credit score thresholds. Credit policies are influenced by the lender’s intent to keep the loan in their portfolio or to sell the loan in the secondary marketplace. Whether the lender relies solely on a credit score or on the overall repayment habits of the applicants, the credit history is a good indication of the applicants’ financial management and how the prospective mortgage loan will be repaid, given a continuance of represented income. A lender may favorably consider repeat consumers/borrowers who have a proven “track record” of repayment or other banking or loan relationships with the lender.
The value, condition of title, and overall quality of the property is evaluated to ensure the collateral will be adequate to secure repayment of the loan. Because of the long terms associated with real estate loans, the lender will estimate not only the current value and condition of the intended security property, but the economic trends in the neighborhood and community where the property is located.