Mortgage Application What It Is How It Works
Mortgage Application: What It Is, How It Works
Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
What Is a Mortgage Application?
A mortgage application is a document submitted to a lender when you apply for a mortgage to purchase real estate. The application contains information about the property being considered for purchase, the borrower’s financial situation and employment history, and more. Lenders use the information in a mortgage application to decide whether or not to approve the loan.
Key Takeaways:
– You submit a mortgage application to a lender when you apply for a mortgage or purchase real estate.
– A mortgage application requires extensive information, including the property being considered for purchase, the borrower’s financial situation and employment history, and more.
– Lenders use the information in the application to decide whether or not to approve the loan.
– One of the most common mortgage applications is the 1003 mortgage application form, also known as the Uniform Residential Loan Application.
– The Federal Housing Finance Agency (FHFA) has put in place more flexible lending and appraisal standards for mortgages backed by Fannie Mae and Freddie Mac to ensure homebuyers can close on loans during the recent economic crisis.
Understanding a Mortgage Application
Once you are under contract to buy a specific property, your lender will initiate the mortgage application. The application asks for a significant amount of information, so it’s best to gather all of your financial details prior to applying.
Although there are several versions of mortgage applications used by lenders, one of the most common is the 1003 mortgage application form, also known as the Uniform Residential Loan Application, which is a standardized form used by the majority of lenders in the U.S. The 1003 form includes all the information that a mortgage lender needs to determine whether a potential borrower is worth the risk of the loan.
The 1003 loan application is a form from Fannie Mae. Fannie Mae and Freddie Mac are lending enterprises created by Congress that purchase and guarantee mortgages. Both require the use of Form 1003—or its Freddie Mac equivalent, Form 65—for any mortgage they consider for purchase, making it simpler for lenders to use the appropriate form at the outset than try to transfer information from a proprietary form to a 1003 form when the time comes to sell the mortgage.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
Mortgage Application Requirements
The information required on a typical mortgage application includes:
Borrower’s Information
– Borrower’s address, marital status, and dependents
– The type of credit being applied for, meaning whether it’s a joint or individual application
– Social Security number and date of birth
– Current employer and address, as well as employment income
Supporting documents, such as bank statements and pay stubs, are often submitted along with the application. If you’re self-employed, you may need to produce two years of tax returns to demonstrate proof of income.
Financial Information
This section asks for your assets or anything that you own that has financial value, as well as your debts and liabilities.
– Assets include bank accounts, retirement accounts, certificates of deposit, savings accounts, and brokerage accounts for stocks or bonds
– Liabilities include revolving credit, such as credit cards or store charge cards, and installment loans, such as student, car, and personal loans
– Any real estate owned and its estimated value or rental income, if applicable
Mortgage Loan and Property
This section is about the home that you’re looking to purchase and all of its details.
– Address of the property
– The loan amount, and the type of loan, such as a purchase or refinance
– Any rental income from the property, if you are buying the home as an investment with the goal of renting it out
Declarations
This section includes a series of questions to determine your intent regarding the use of the property and to disclose any other legal or financial matters not included in the application.
– Will the home be your primary residence or your second home?
– Are there any judgments, lawsuits, or liens against you?
– Do you have any past foreclosures, or are you a guarantor for another loan?
Acknowledge and Agree
This section is where you sign the application, stating that you believe the information provided is accurate and true.
The information submitted on the mortgage application will be verified and examined by the bank’s underwriter, who will then decide how much the bank will loan to you and at what interest rate. When your mortgage application has been approved, the bank will send you a loan estimate, which details the closing costs, and finally a commitment letter. At this time, you may need to pay a deposit of your closing costs to cover the cost of an appraisal.
Special Considerations
The mortgage application is just one step in the loan application process. Borrowers need to first assess their finances. Lenders prefer to see a debt-to-income (DTI) ratio that doesn’t exceed 35%, with no more than 28% of that debt going toward servicing your mortgage. For example, if you earn $85,000 a year, then your housing expenses should not exceed $2,480 a month. Housing expenses include not only the potential mortgage payment but also the home insurance, property taxes, and condominium fees, if applicable.
Lenders will also charge for private mortgage insurance (PMI) if the borrower has a down payment that’s less than 20% of the purchase price of the home. PMI protects the lender in case the borrower can’t pay off the loan.
Important:
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
Because of this, it’s important to consider the size of your down payment. A smaller down payment will lead to a larger monthly mortgage payment. Conversely, if the borrower puts down at least 20%, then the monthly payment is less and there would be no monthly PMI payment. Conventional mortgages generally require a minimum of 5%, while Federal Housing Administration (FHA) mortgages ask for 3.5%. Veterans Affairs (VA) mortgages often require nothing down.
The next step is to approach a lender for pre-qualification, which includes a credit check that helps the lender assess how much to lend you. Once you have your pre-qualification letter, it allows you to start shopping for homes.
