Chapter 7: Loan application and approval

How can a lack of preparation impact a mortgage approval?

It can significantly delay the process and reduce an applicant's chances for loan approval.

What is the benefit of making a loan application before offering a sales contract?

It provides more weeks to resolve problems and approval may even be obtained before selecting a home, giving the purchaser more leverage with the seller.

What personal history information should an applicant bring to a loan application?

Address (2 yrs), employment information, SS, DL, info about rental properties.

For a home purchase, what documentation is needed regarding the home?

Sales contract, property tax and HOA information, and other contract contingencies.

For a home refinance, what documentation is needed regarding the home?

Copy of the deed and existing note and information regarding any prepayment penalties on your present mortgages.

What specific documentation is required for a condominium purchase?

A pre-sale (condo cert) obtained from the Homeowner's Association

What income documentation is required for employed applicants?

Pay stubs covering the most recent 30-day period and W-2s for the past two years.

What income documentation is required for self-employed applicants?

year-to-date profit and loss from the business, previous two years' complete Federal individual tax returns and previous two years' complete Federal corporate or partnership tax returns.

When are two years of individual tax returns needed for applicants who earn variable income?

When more than 25% of their income comes from commission, bonus, or overtime

What asset documentation is generally required for liquid assets like savings, checking, and mutual funds?

The prior three months' statements. For FHA and VA its 2 mo statements

If cash for the transaction is coming from a gift, what documentation is required?

The lender will provide an acceptable gift letter filled out by the donor, and most lenders will accept a copy of the donor's bank statement as evidence of ability to give the gift. Proof of receipt of funds is typically required later.

What documentation is needed for the deposit or escrow check used for the home purchase?

A copy of the deposit or escrow check. If not a bank or cashier's check, a copy of the canceled check (front and back) after it clears the bank account.

What information should be provided for all outstanding liabilities?

The balance, monthly payment, account number, and lender address. A copy of the latest statement or a page from the payment coupon book will suffice.

When is written explanation required for a gap in employment?

When there is a gap of more than one month during the previous two years

What should an applicant provide if there are significant credit blemishes like bankruptcies or judgments?

Documentation to back up the explanation

What does a loan officer check on pay stubs during review?

If year-to-date income matches monthly salary, if any regular withdrawals could be debt payments, if personal information matches, if the pay stub is dated within the past 30 days, and if overtime, bonus, or commission income is broken out.

What does a loan officer check on W-2s during review?

If W-2s are present for the prior two years, if the social security number and name are correct, if the employer's name is correct, and if the income matches the reported salary level.

What is the purpose of the processing department of the mortgage lender?

To get the loan ready for submission to the underwriting department for final approval.

What is "alternative documentation" in the mortgage process?

The use of W-2s, pay stubs, and bank statements provided by the applicant as the final income and asset documentation, rather than verification forms sent to employers and banks

What does a What is the primary role of the underwriter once a loan package is complete and well-documented?

To check that the loan does not exceed limits for the program, ensuring loan-to-value is correct, no excess seller contributions, and ratios are within guidelines or supported by compensating factors.

How has automated underwriting impacted the loan application process?

It allows underwriters to focus on files needing closer review and can reduce documentation for applicants with good credit, income, and assets