What Factors go into a Mortgage Loan Approval?
When contemplating the issuance of a mortgage approval – or mortgage commitment, as it is referred to by some lenders – the bank/lender takes several things into consideration. Among these things are details relating to the property: Value, condition, location, number of units, living space vs number of occupants, and anything that might affect the title (liens, cloud, break in chain, and claims made by third parties). Most of the information a lender will require about a given property will be provided by an appraisal report and a title report.
Other things a lender considers in order to make the most prudent decision in the mortgage approval process are details relating to the buyer: Creditworthiness, outstanding credit, earnings, employment stability, expectancy of continued employment, cash assets, non-cash assets (reserves), ability to budget/save, and other properties owned, if applicable. All the documents and information collected from, and about, a borrower and that which is collected about the property, is put together in a legal-sized folder and processed, underwritten and approved; or “unapproved” for one late developing reason or another.
It must be pointed out of course that all the information required to make a lending decision, which is usually reflected in the form of a mortgage approval/commitment letter, is usually not collected simultaneously; it comes in various stages of the application process, each stage being of significant importance to the entire process because the lender depends heavily on the knowledge, competence and professionalism of each employee responsible for completing his/her work satisfactorily in order to make the best lending decision. These stages, which can vary from lender to lender are: Origination, Processing, Underwriting and Closing. Let's take a closer look at these stages.
The mortgage approval process begins with an application being originated. This is best described as when a mortgage lender representative meets with a prospective borrower and the two work together to complete the mortgage loan application, also known as the URLA Uniform Residential Loan Application) after discussing the borrower's loan preferences, gather appropriate income/asset documents, and discuss any discrepancies or other errors that may appear on the borrower's preliminary credit report while collecting any fees (appraisal, credit report and/or application/lock-in fees) required to get the process started.
At this stage it is important that the “loan originator” (also Loan Officer/Account Executive) be knowledgeable and/or experienced in as many aspects of mortgage lending as s/he can possibly be, thereby having the ability to qualify the loan as a “good quality” loan worthy of an approval. However, as of January 2010 – extended through May 2010 – it mattered not how much a loan originator might have known about mortgage lending, because at that time a new level of education and licensing requirements were introduced through the S.A.F.E. Act and administered by NMLS (Nationwide Mortgage Licensing System & Registry) to make sure that mortgage originators and other professionals are qualified to work in their respective positions.
The stage that follows loan origination is loan processing, which consists of a review of the loan application documents and other borrower information (on the URLA) for acceptance by the lender, entering the loan into lender's system (logging it in) and setting up a mortgage loan package, which will be examined for compliance with loan program ratios to determine income qualification, required years of consecutive employment, credit debt qualification, enough cash assets to cover down payment and closing costs, and whether or not there are any conflicting or ambiguous information that need explaining in any area of information made available by the borrower.
Processors are also required to be highly qualified individuals so that the decisions they make to recommend approval or denial of a mortgage application will be based on sound principles as they relate to the particular mortgage program (Conventional, FHA, etc.) guidelines pursuant to which s/he is making such recommendations and determinations. The next stage, mortgage underwriting is where the actual approval or denial of a loan is made official. The underwriter usually has the final word in the mortgage approval process.
The mortgage underwriter's job is to do a complete review of all aspects of the borrower's information and measure it against sections areas of the program guidelines in order to “sign off” on (approve) the loan and issue the mortgage loan approval/commitment letter. The underwriter must be able to see the “big picture” or complete package; but s/he has a tool that no one else in the process has, a tool that is properly referred to as “underwriter's discretion.” With this tool an underwriter can consider other factors of the loan which s/he believes are enough to compensate it's strength and therefore uses them to justify approving it. These factor are known as compensating factors.
Once a loan is approved by an underwriter, it is then given to the closing department for title review, and in that regard, to ascertain that all violations, if any, against the property or the buyer have been removed and all title requirements have been met. Absent any objections to title the closing can then be scheduled conditioned upon last minute credit updates and job verifications, as well as the borrower providing any last minute items like latest paystub, and insurance policy at the closing table. Usually a loan will not reach this stage if it's not a good quality loan, because at some stage of the process it will be stalled, especially in the case where a borrower's verbal statements cannot be supported by documents.