Once the mortgage application has been turned in, many applicants often wonder what the lender will do with their application, and if there are any additional steps they should take while waiting for the mortgage lender’s decision.
After receiving all the required application documents, the bank will begin to review them and asses if the risk associated with the loan is in line with their lending standards through a process known as ‘underwriting’. The lender will look at what is refereed to in the industry as the three Cs.
Credit. Capacity. Collateral.
Credit: As outlined in previous articles, credit plays a major factor in a lender’s determination of a mortgagee’s risk. Reviewing the credit report, and credit score, the lender will make an educated estimate of the probability of being fully repaid on this loan.
Capacity: Next, the lender will review the applicant’s capacity to repay. This will be assessed by reviewing the W2 forms, the employment history, as well as looking at current debts and assets. The lender will then compare the debt obligations the borrower already has, and compare that to the proposed mortgage payments in relation to the income the borrower receives.
Collateral: The collateral would refer to the property for which the mortgage is issued. The lender will look at the current value of the property, the proposed use, as well as the current trends in the asset class. The lender will then approximate the value they could receive if they were forced to foreclose on the property in an event of a default. This amount would be compared to the total amount loaned, and would be included in the risk assessment.
Overall, after reviewing the three Cs, a lender will have a good standing on if the loan is appropriate, given the risk profile of the borrower, and the property involved.
While the lender is underwriting the mortgage, there are things that an applicant can do, the first of which is a home inspection.
A home inspection is used to determine the structural condition of the home. An inspector will review the major components of the house including the roof, a/c system, basement, plumbing, electrical, and others to look for proper condition and building practices.
The home inspection is best done after agreeing upon the price of the sale, but prior to signing the final documents.
Typically, an adequate home inspection will run between $300 and $750.
A fear of many applicants, especially first-time homebuyers, is to be denied for a mortgage. Although the possibility is there, the chances of such event, particularly if one were to carefully select a good mortgage lender and correct loan type, is low.
That being said, if the event does in fact occur, there are steps to take which will help in future circumstances:
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 these are curable, and can be remedied prior to a new application.
Some lenders will entertain a second review of your case if you can present something which has changed since the application was submitted. Have you paid down a credit card? Removed an incorrect account from your credit report? Let them know, and request a second opinion.
A third option is to keep shopping. Not all lenders have the same underwriting standards or
metrics. Just because your criteria doesn’t match the first lender’s criteria that does not mean it won’t match the next lender’s requirements.