Underwriter
How does the mortgage application process work?
To qualify for a mortgage there are a number of factors. The application often can take several days to complete as you gather information. The saddening part of most mortgage applications is the time it takes for denial or approval, often weeks, sometimes months.
First there is your credit history and credit score. But that really just establishes the interest rate and percentage down payment requirements. The exception to this would be extreme cases. A minimum credit score seems to be about 550 to 600. The higher your credit score, the lower your interest rate. The higher your credit score lower the required down payment.
Second is your ability to pay monthly. In the past, this was typically 30% of gross household income. If there were other time payments (car, cottage, boat), depending on the size and their history, these monthly payments might be included in the upper limit of total monthly payments allowed.
Another filter is the 3 times factor which would set the maximum amount of loan for the individual. This means that 3 times the gross annual income of the family is the ceiling for indebtedness for the family. Depending on the situation, cars, boats, credit cards and so on are included in this total.
The next factor is the down payment. Depending on credit score and type of loan (conventional, special, FHA, HUD, VA) there may be rules which apply, perhaps 5% down.
The next factor is the need for Private Mortgage Insurance. In the past, this was required by the underwriter if equity in the property was less than 20%. The cost of this insurance is dependent on factors similar to the mortgage evaluation.
The last major factor would be evaluation of the property by an independent real estate appraiser. This evaluation would be sourced not only from local similar sales but also from a formula reflecting the features of the home and property.
There are other factors but the point to be made here is that someone is charged with the responsibility of checking out the individual for credit worthiness and the property for true value. Depending on the results a number of punitive conditions apply including:
- higher interest rate
- shorter term
- higher down payment
- monthly payment limits
- total loan amount limits
- private mortgage insurance
That is how the mortgage application business was designed to work.
The financial institutions have become more creative in recent years with:
- mortgages which included interest only and no principal payments,
- mortgages below prime for the initial years which catch up with balloon interest and principal payments after the initial years. Subprime mortgages.
- negative amortization with catch up balloon payments
- and others I am certain of which I either have not heard or do not understand.
OK, that’s how mortgage applications are completed. Here’s a summary of available mortgages:
- simple mortgages with yearly principal payments
- amortized mortgages which reduce the monthly payment by including an additional overall cost in the mortgage.
- amortized mortgages which are 30, 35, 40 years in length.
- creative mortgages with special interest rates, delayed interest payments, no principal payments and so on…
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