The mortgage application process requires considerable paperwork. First there is the application form, which asks for detailed information about you, your employment record, and the house you want to purchase. To help determine your ability to repay the mortgage, lenders require documentation on your personal finances, such as income, earnings, monthly expenses, and debts.

Lenders also examine your credit reports to learn if you pay your bills on time. A lender may reject your application if the report shows that you have a poor credit history, so make sure your credit file is accurate before you apply for a mortgage. You have the right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says. To request your free credit report, go to annualcreditreport.com.

You can prepare for questions about your financial condition by using the first section of the worksheet found at the end of this article. The worksheet helps you determine how much money you have available for a monthly payment – just list all items of income and payments required on debts that won’t be paid off within ten months. There is also a place for the estimated mortgage payment quoted by the lender.

To figure the mortgage payment, the lender begins by asking how much you want to borrow. The maximum loan amount is determined by the value of the property and your personal financial condition. To estimate the value of the property, the lender requires an appraisal of the property to give an opinion about its value. The appraisal is an important factor in determining whether you qualify for the size of the mortgage you want.

Lenders usually lend up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and expect a down payment to make up the difference. If the appraisal is below the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value. 

When looking at your projected mortgage payment and existing debt, some lenders might use ratios such as “28 and 36” to determine whether you qualify for the loan. These are commonly used ratios. In the case of “28 and 36,” the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments for your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios are used to evaluate your application. The second worksheet helps you calculate whether you are within the lender’s guidelines.

Be prepared to provide certain documentation about your income (W2s for prior years and year-to-date pay stubs), current debts (account numbers, outstanding balance, and creditor’s address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process takes. The time varies depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It’s common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.

If your application is turned down, federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given. You may be able to find answers or alternatives that satisfy the institution’s lending standards. Even if that does not happen, understanding fully why the loan was denied may improve your chances with the next lender you visit. Factors that may affect the loan decision include the amount of your down payment, the home’s appraisal, and your credit history.

Is your proposed down payment sufficient? If not, perhaps the lender offers other types of mortgages with lower down payment requirements.

Is the size of the mortgage you need too high given the property’s appraised value? If similar houses in the neighborhood have sold at prices comparable to yours, maybe the appraiser undervalued the property. Suggest that the lender reexamine the appraisal. You also have the right to receive a copy of the appraisal if you have paid for it.

Is the lender doubtful because of your level of debt, because of your credit history, or about your ability to make the monthly payments? Ask how your debt ratios compare to the lender’s standards. If there were special circumstances surrounding old credit problems, ask for a chance to explain.