Loan Application and Lender Processing
The first stage of the lending process revolves around filling out the application, verifying the information on the application, confirming the value of the property, and validating the encumbrances and liens on the property.
Filling Out The Application
Most residential lenders use a standard uniform application that is accepted by the major secondary market investors, such as FNMA and FHLMC. The form is commonly known as Form 1003 and is divided into 11 sections. Generally, this form is initially completed by the consumer or together with the loan officer with a final one prepared by the lender after verifying the information on the application.
It is extremely important that the application contain accurate information. Many times a loan officer will work with borrowers to help in completing the application and in gathering important documentation, such as tax returns.
The following lists the sections of the uniform residential loan application:
- Type of Mortgage and Terms of Loan.
- Property Information and Purpose of Loan
- Borrower Information
- Employment Information
- Monthly Income and Combined Housing Expenses Information
- Assets and Liabilities
- Details of Transaction
- Acknowledgement and Agreement
- Information for Government Monitoring Purposes
- Addendum for Additional Information
Generally, before the validation process begins, the lender or broker will require a check to pay for the credit report and appraisal. There is information contained in three major areas on the application that the lender is interested in validating: (1) employment and income, (2) funds to close and (3) credit information.
Verification of Income: Sections 4 and 5 of the application asks for information about the borrower's employment and income. There are several ways to verity this information:
- A current pay stub from borrower(s) employer.
- W2's from the borrower(s) employer -- most recent two years.
- Written verification of employment from the employer (lenders request this information directly from employer).
- Federal tax returns for last two years and current period profit and loss statement for self-employed borrowers.
- Verification of employment noted on a credit union -- income not usually verified.
All or some of the above may be used by the lender in validating employment and income of the borrower(s). Periods of unemployment and dramatic rises in income may need to be explained.
Verification of Funds to Close: Section VI of the application asks for information regarding the borrower's assets. Cash and cash equivalents, such as stocks and bonds, are noted in this section, as well as equity ownership in other assets, such as real estate. Some or all of these assets may be used for the down payment and for paying the loan closing costs. The lender will need to validate these assets before a credit decision can be rendered. There are several ways this can be done:
- Borrowers may provide a copy of the last 2-3 months of bank depository or investment company statements.
- Written verification of deposit from the depository institution -- (lenders transmit this information directly to the institution(s)).
- Copy of the last 2-3 months stocks and bonds statement from investment company -- usually tradable securities on an exchange are acceptable.
- Copy of the sales contract on any real estate to be sold. The lender will verify the balance on any liens on the property to validate the equity and will require a final HUD 1 verifying the receipt of the funds. The verification of mortgage can be verified from the credit report, existing lender (in writing) or from a current statement.
Some or all of the above may be used by the lender to verify the funds to close. Even though refinancing an existing loan does not necessarily require cash to close, lenders still may require validation of the borrower's assets.
Credit Report: One important indicator of a borrower's willingness to repay the proposed mortgage debt is his/her history of meeting credit obligations. Credit reporting agencies have access to central repositories that collect, store and report credit obligations and pay records on most consumers. This information can be obtained by interested parties contemplating the extension of credit to a consumer. Banks, department stores, mortgage lenders and other creditors provide this information to repositories, such as Trans Union and TRW. Credit reporting agencies can also access public record files to determine if a consumer has any collections, judgments, liens, repossessions or foreclosures. Other information on a consumer's credit report may include present and past addresses, present and past employment, and banking relationships. The reports indicate the present and highest balance on the credit, terms of the repayment and the payment history. Sometimes past credit problems can be easily explained and a letter of explanation from the borrower may be appropriate.
Other Material Information: There may be other material items on the loan application that the lender may need to validate such as social security, child support, future raises, etc.
Property Value Confirmation
The security or collateral for residential mortgages is real property. Residential real property includes single family detached, attached homes, condominium units, and homes in a planned unit development (PUD). These properties can be used for primary residence, second homes and investment. Before lenders issue a loan commitment, they want to know the value of the property so that they can assess the overall risk of the loan. An independent appraisal on the property is the most effective approach in determining the value. Appraisals use three approaches in the valuation analysis.
The valuation approaches are:
- Cost Approach: The value of the land plus the cost of the improvements less depreciation.
- Market Approach: Compares the subject property with similar properties that have sold recently in the neighborhood.
- Income Approach: Determines the value based on the rental income that can be derived from the property.
Although all three approaches are considered in an appraisal report, the market value approach is usually given the most weight because it reviews the most current sales surrounding the property.
Most appraisals begin with a physical inspection of the property by a professional appraiser. During the inspection, the appraiser measures the property, locates the rooms on a drawing, and notes the overall condition of the property and surrounding neighborhood. After the inspection, the appraiser locates both the sales activity and current listings in the area from real estate databases and prepares a written report. The report indicates the value of the property and summarizes the important aspects of the valuation process. Sometimes, appraisals are completed without the physical inspection and the value of the property is based solely upon the market approach.
After the appraisal is completed, the consumer is normally entitled to a copy of the appraisal from the lender.
During the loan processing, lenders require that a title search be performed on the property which will reveal the legal description, the owner of record, and outstanding liens and encumbrances on the property. Liens are items such as property taxes, mortgage loans, and judgments. Encumbrances may be road maintenance agreements, right of way and utility easements. Usually, a plot map or land survey is prepared as part of the title search to show the location of the improvement on the property. After the search has been completed, the title company will prepare a written document that reflects their findings and delivers the report to the lender. This report is commonly called a preliminary title report.
After the loan is closed, the title company will prepare a title policy that reflects the new mortgage loan as a lien on the property. The policy is called an American Land Title Association (ALTA) policy. Additionally, if there was a transfer of title, the new owner usually obtains a title policy as well.