13. Applying, Qualifying, and Securing a Home Loan

Buying a home is often described as the American Dream. The truth is most of us need a home loan to some degree to buy that house. Only about 30 percent of homes purchased in the United States are purchased with cash. The rest of us need a loan. Approval of your application and the terms offered will largely affect the affordability of the home, or whether you can buy the home at all.

In this regard lenders hold a tremendous amount of power over what for most is the single largest purchase or investment you will ever make. It is my contention that if you do not know in advance that you will be approved and under what terms before you approach a lender, you are already behind the 8-ball. Most buyers hope and pray for approval. Sophisticated buyers already know they will be approved and what terms the lender should be offering to be competitive, and if the lender’s offer is not competitive, the buyer moves on to another lender. Buyers armed with information and a great credit score hold a tremendous amount of power, most just do not know it.

Home Loan Approvals and the Legal Framework

At its core, a home loan approval is a lender’s determination that a borrower meets established criteria to receive mortgage credit. From a legal standpoint, mortgage approvals are governed by contract law, banking regulation, and consumer protection statutes.

The Truth in Lending Act requires lenders to disclose loan terms, interest rates, APR, and total costs. RESPA governs settlement costs and prohibits kickbacks and referral fees that could improperly influence loan approvals. After the 2008 financial crisis, Dodd–Frank introduced the Ability-to-Repay Rule, which requires lenders to verify that a borrower has a reasonable ability to repay the loan. This rule is enforced by the Consumer Financial Protection Bureau.

Stages of a Home Loan Application and Approval

The approval process typically involves three stages:

• Pre-qualification, which is informal and not legally binding. It is an estimate of how much you might be able to borrow based on basic financial information.

• Pre-approval, which involves documentation. A pre-approval letter is a conditional offer stating a lender is tentatively willing to lend a specific amount.

• Final underwriting approval, which triggers regulatory disclosure obligations and contractual commitments. This means you are “Clear to Close” and is the final step before signing and funding your mortgage.

Qualifying for a Home Loan

Before you can get loan approval, you must qualify. Generally, a mortgage application approval hinges on your creditworthiness, financial capacity, and the property’s value.

Lenders use factors often called the “Four C’s”:

• Credit: your credit score and history of managing debt.

• Capacity: your ability to repay based on income, employment, and debt-to-income ratio.

• Capital: your savings, investments, and down payment funds.

• Collateral: the home itself, valued by an appraisal.

Credit Score Still Matters

The single most important factor to the lender in qualifying for a home loan is your credit score. A difference of only 1 percent in your interest rate can add up to thousands of dollars over the term of your mortgage. To learn more about credit scores, read our previous Bar Essentials blog: Credit Scores >

If Your Application Is Denied

If your mortgage application has been denied, the process does not necessarily end. Denied borrowers have the right to receive a written explanation, request reconsideration, file complaints with regulators, and pursue civil litigation in cases of discrimination.

Closing Thoughts

A denial means someone, or something, is preventing you from doing what you want to do. A much better approach is to manage your credit score and other metrics in advance of your application so that you not only avoid a denial, but approach the lender knowing you will be approved, and that if they are not competitive in their offer there are virtually an unlimited number of competitors who would be delighted to have your business.

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