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 is extensive and 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 has put in place more flexible lending and appraisal standards for mortgages backed by Fannie Mae and Freddie Mac to make sure that homebuyers can close on loans during the COVID-19 pandemic.

Understanding a Mortgage Application

Once you are under contract to buy a specific property, your lender will initiate the mortgage application. The mortgage 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 that are 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 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 the Federal National Mortgage Association, or Fannie Mae. Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corp.) are lending enterprises created by Congress that purchase and guarantee mortgages. As both require the use of Form 1003—or its Freddie Mac equivalent, Form 65—for any mortgage they consider for purchase, it is simpler for lenders to use the appropriate form at the outset rather than try to transfer information from a proprietary form to a 1003 form when it comes time 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 to the Consumer Financial Protection Bureau (CFPB) or with 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, 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 deposits, 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 it's estimated value or rental income, if applicable

Mortgage loan and property

This section is about the home you're looking to purchase and all of its details.

  • Address of the property
  • The loan amount, 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 how you want to use the property and to disclose any other legal or financial matters not included in the application.

  • Will the home be your primary residence or second home?
  • Are there any judgements, lawsuits, or liens against you?
  • Any past foreclosures or are you a guarantor for another loan?

Acknowledge and agree

This section is where you sign the application, essentially stating that you believe the information that you 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 towards servicing your mortgage. So, for example, if you earn $85,000 a year, your housing expenses should not exceed $2,480 a month. Housing expenses include not just the potential mortgage payment but also the home insurance, property taxes, and condo 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.

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 at least 20% down, the monthly payment is less and there would be no monthly PMI payment. Conventional mortgages generally require a minimum of 5%, while FHA mortgages ask for 3.5%. 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.

COVID-19 and Applying for a Mortgage

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. It did this to make sure that homebuyers can close on loans during the COVID-19 pandemic and that all parties involved can maintain social distancing throughout the process. These standards now allow:

  • Alternative methods for documenting income and verifying employment before loan closing (for example, employment verification via email)
  • Expanding the use of power of attorney to assist with loan closings (for example, e-signatures)
  • Alternative appraisals on purchase and refinance loans (conducting drive-by and online appraisals instead of on-site appraisals)

The lending and appraisal standards for homebuyers applying for a mortgage during the pandemic are in place until Feb. 28, 2021. The time frame for them to expire has been extended several times during the pandemic.

Fannie Mae and Freddie Mac help to reduce the risk to lenders when making mortgage loans. Also, Fannie Mae buys mortgages from banks and resells them as investments. Since banks have limits as to how much of their total deposits they can lend out, Fannie Mae's mortgage-purchase-and-resale role helps banks to free up their balance sheets—allowing them to make additional loans.