If you are purchasing a home, it is a good idea to get pre-qualified by a lender to determine the maximum loan amount you may borrow and what the mortgage payments will be.     

The Application Form

Residential  lenders typically use a standard application form that is accepted by the major secondary market investors (FNMA and FHLMC).

A preliminary draft of the form is prepared and the lender collects a credit report and appraisal fee from the borrower.  Once the information gathered has been verified, a final form is usually prepared. 

The uniform residential loan application contains the following information:

1. Type Of  Mortgage And Loan Terms

2. Property Information And Purpose For The Loan

3. Borrower Information

4. Employment Information

5. Monthly Income And Housing Expense 

6. Assets and Liabilities

7. Details Of The Transaction

8. Declarations

9. Acknowledgement And Agreement

10. Information For Government Monitoring Purposes

11. Additional Information Addenda

The Verification Process

Lenders verify the information supplied by the borrower to determine that the borrower has the following: [1] sufficient income and employment stability, [2] funds to close the loan and, [3] credit information to indicate a repayment pattern. 

Income and employment verification can be obtained from:

• A current pay stub from your employer.

• The most recent two years W-2 forms from the borrower's employer.

• Written verification from the employer. 

• Federal tax returns for the most recent two years and current profit and loss statements for self-employed borrowers.

• Employment verification noted on the credit report.

The lender checks for periods of unemployment or sharp changes in income when validating the borrower's employment and income stability and will usually ask for explanations.

The application requires a listing of the borrower's liquid assets such as cash, stocks, bonds, etc. as well as other assets to verify that sufficient funds are available for the down payment and to cover closing costs.

Asset verification is necessary in a purchase or refinance transaction before the credit decision is rendered. This may be accomplished in a number of ways.

• Providing copies of  the last several consecutive months of  bank or investment company statements.

• Written verification of deposit funds  from your bank or depository institution. 

• Copy of  any real estate sales contract involving a purchase.  The lender  will verify  the balance of any liens on the property to confirm the amount of equity.

Credit Report  

A credit report measures the borrower's willingness to repay credit obligations. Central credit reporting repositories accumulate data on most borrowers and make this information available to other parties who are contemplating the extension of credit.   Credit reporting agencies may also check for judgments, liens, repossessions or foreclosures through public records.  The report may also include present and past addresses, employment, indicate banking relationships, present and highest balances on past loans, credit cards, monthly payment amounts, terms, and payment history.  If, in the course of reviewing your credit report, you discover errors,  wrong information, or dispute a debt, a letter of explanation should be sent to the reporting agency. 

Other Information

Essentially any information which influences your ability to repay an obligation will be validated such as child support payments, future raises, social security, or contingent liabilities such as cosigned loans or lawsuits, etc..

The Real Estate Appraisal

Before committing to the mortgage loan, the lender will want to know the value of the property to assess loan risk.  In the event of default by the borrower, the real estate becomes the secondary source of repayment.  Lenders will generally require an appraisal on the property to establish fair market value.  The appraisal report utilizes three valuation approaches to determine value. 

• Cost Approach:  Estimates the value of the land plus the cost of  improvements minus accrued depreciation.  Accrued depreciation includes normal wear and tear, estimated costs for immediate repair items, functional obsolescence attributable to deficiencies or over-improvements which may not return full cost at resale, and finally external obsolescence which is the value loss attributable to influences outside your property such as a landfill, toxic waste site, heavy traffic on a residential street, etc.

• Market Approach:  Estimates value by comparing your property to recent sales of similar neighborhood properties.  This process reflects a probable value of what buyers will "typically" pay for a home having similar features and amenities.  

• Income Approach: Estimates value based on the potential income earning ability of the property.  Usually not very meaningful for valuing single family dwellings that are predominantly owner occupied but particularly meaningful in valuing a duplex or other income property. 

During the appraisal inspection, the appraiser will measure the property and record specific features, note the condition of the property,  and describe the surrounding neighborhood.  Then, the appraiser estimates the value of the property by locating and comparing other sales and listings to the subject property.  The final written report summarizes important aspects of the property and reveals a "most probable" value to a "typical",  informed buyer. The value conclusion in the report is based upon market value as specifically defined.  Although the consumer is normally entitled to a copy of the appraisal, this is generally obtained from the lender who actually engages and contracts with the appraiser to perform  the report for loan underwriting purposes.  

The Title Search

In most all cases, lenders will require that a "title search" be performed to: [1] verify the legal description, [2] identify owners of record and, [3] to reveal any outstanding liens or encumbrances on the property.  Liens include past due property taxes, judgments, and other mortgage loans.  Encumbrances include right of way, maintenance agreements, home owner association assessments,  and utility easements.  A land survey is usually prepared and compared with the title search.  Upon completion of the search, a preliminary title report is delivered  to the lender. 

After loan closing,  the title company prepares a final title policy called an American Land Title Association (ALTA),  that covers the new mortgage loan (lien) on the property.  The new owner usually receives a title policy as well.