by Uchenna Ihejirika

Created on: November 16, 2009   Last Updated: November 18, 2009

Owning a home has always been an essential element of the American dream, and one of the most critical investment decisions anybody would make in life. Just before the mortgage crisis, home ownership was so easy and simplistic. This was for the simple reason that due process was not followed by mortgage companies and banks in approval and advancement of loans. The ensuing inability of most home owners to meet their loan obligations, and the consequent foreclosures and its ripple effects on the economy was a wake up call for lenders to review loan approval guidelines and requirements, necessitating a tightening of existing loopholes that were previously abused.

The mortgage loan approval process today places more burden on the prospective home owner, to ensure that all necessary information needed to back up the loan application are readily available. The lender needs to have all material information (facts and figures) to prove that the mortgagor (loan applicant) has the ability and resources to fulfill the loan obligations.

An individual seeking to buy a home by reason of the existing strict regulations, have to get a mortgage loan pre-approval or pre-qualification which involve an assessment of the individual's financial standing by which the lender decides if the individual is qualified and how much loan the person could secure.

The following factors are taken into consideration by the lender in reaching a decision in approving or denying a loan application. The loan applicant's debt profile, consisting of such commitments as auto loans, student loans, credit card payments are calculated against the anticipated monthly mortgage costs to determine the person's ability to sustain the mortgage loan.

Another key issue is the individual's credit history. An individual's credit report is a reflection of the person's financial discipline. The lender needs to know if the loan applicant has a history of credit payment defaults as well as defaults in payment of utility and other bills.

The applicant's income is also a very important determinant of the success or failure of a loan application. The lender has to be sure that the loan applicant's P.I.T.I (Payment, Interest, Property Taxes, Insurance) does not exceed 28% of the person's pre-tax monthly income. Further to this, the lender is also interested in the applicant's job history. The lender needs to be sure that the applicant has maintained a steady job for a reasonable length of time.

Finally, the loan applicant has to show evidence of availability of cash in lieu of the down payment which may range from between 5% to 20% of the loan sum. This is in addition to the closing costs which cover such fees for land survey, credit checks, title insurance, inspection and appraisal.

In the case of a first home buyer, it is advisable to seek the advice of a Realtor for detailed explanation of what to expect in the loan application process. It would also be necessary to discuss with a mortgage broker in view of the need to get a pre-approval or pre-qualification.

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