Mortgage application: a borrower's guide

By Marcie Geffner • Bankrate.com

Highlights

• When it asks for your two-year job history, it means two years. At least.
• The section on monthly income can get kind of tricky. You might need help.
• In the assets section, the lender wants to know if you have saved money.

A mortgage application serves a simple purpose: to help the lender decide whether to lend money to the borrower. But the industry standard Uniform Residential Loan Application, also known as Fannie Mae Form 1003, is more complicated than that straightforward intent might suggest.

This section-by-section summary should help you figure it out.

Section 1: Type of Mortgage and Terms of Loan. This section, which describes the loan program for which the borrower wants to apply, is "generally not something the consumer is going to be able to complete," explains Greg Cook, a loan consultant and first-time homebuyer specialist at Guild Mortgage Co. in Temecula, Calif. Instead, the loan officer will fill in the details.

Section 2: Property Information and Purpose of Loan. Most homebuying loan applicants haven't identified the property they want to purchase. That means parts of this section will be marked "to be determined," Cook explains. Borrowers will need to indicate who will own the property and how title will be held. They'll also have to disclose the source of their down payment (e.g., cash, gift, first-time homebuyer program).

Section 3: Borrower Information. This section asks for the borrower's and co-borrower's full names, birth dates, addresses, telephone numbers, Social Security numbers, marital status and other details. All of it, Cook says, should be "a no-brainer" for borrowers.

Section 4: Employment Information. This section enables the lender to contact the borrower's employer (or employers) to verify the length and terms of employment.
A two-year job history typically is a minimum requirement, according to Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co. in Minneapolis. That means specificity is crucial. "If you get lazy and two years was really one year and 10 months, then all of a sudden the whole loan could be messed up," he warns.

Section 5: Monthly Income and Combined Housing Expense Information. The left side of this section is used to determine whether the borrower has the financial ability to repay the mortgage. Cook says this information often "requires some tweaking" because lenders calculate income differently than most borrowers perceive it.

Virtually all lenders require you to sign Internal Revenue Service Form 4506-T, which authorizes the lender to request a transcript of your tax returns.

One potential glitch for self-employed borrowers early in the year is that last year's earnings can't be used for loan qualification purposes until the lender can obtain verification of a current tax return from the IRS, Dacey explains. It takes four to six weeks for the IRS to process and verify a Form 4506-T.

The right side of this section discloses the so-called payment shock the borrower will experience as he or she transitions to new, often higher monthly housing costs.
"If someone has been living with Mom and Dad, paying zero rent, and is taking on a $1,500 payment and hasn't been able to save any money, that's a signal to the lender to look closer," Cook says. "If they're paying $1,200 in rent and the new house payment is $1,400 and they have a down payment and good credit scores, the lender is not so worried."

Section 6: Assets and Liabilities. Assets refer primarily to savings, checking, and retirement accounts and other investments. "If you have demonstrated an ability to save and it's your own money in the deal, it makes lenders feel better," Cook says.
Retirement savings typically aren't counted at 100 percent, Dacey explains, due to investment volatility and early withdrawal penalties and taxes. As a general rule, retirement savings are marked down to 60 percent or less, he says.

Liabilities can be listed from the borrower's credit report, Cook says. Alimony and child support payments also must be disclosed, so the lender can evaluate the borrower's financial obligations.

The separate Schedule of Real Estate Owned gives the lender a snapshot of the borrower's other properties, if any. This section is especially important for move-up buyers who intend to keep their current home as a rental.

Section 7: Details of Transaction. Cook says borrowers are "never going to fill out" this section because the details depend on the terms of the loan origination. Still, read it carefully.

Section 8: Declarations. This section is the last chance for borrowers to "own up," to use Cook's words, to any financial hiccups they've experienced such as a bankruptcy, foreclosure or lawsuit. "Tell your lender everything," he advises. "If it can be fixed, we can fix it up front. If it can't be fixed, there's no sense getting into escrow on a house you're never going to close on."

(source: Bankrate.com)