In processing your loan application, the lender primarily will be interested in two things:

• the property that you plan to buy (since it serves as collateral for the loan), and
• your financial situation and your credit history (since they will determine your ability and your desire to repay the loan).

The lender will request an appraisal of the property, request a credit report on you and any co-borrowers, and verify the information in your loan application. Let's look at each of these steps in turn.

Property appraisal

The lender will arrange to have the property appraised, a service for which you may be charged. A professional appraiser will determine the market value of the house. This information is required because the lender will loan you not more than a given percentage (often 95 percent) of the value of the property (what lenders call the "loan-to-value ratio"). If the appraised value is less than the purchase price you have agreed upon, the amount of your mortgage may be smaller than you anticipated and you will have to come up with a larger down payment. However, if you have included an appraisal contingency in your contract, you may be able to renegotiate the purchase price in the event of an unexpectedly low appraisal.

The lender will order a credit report on you and your spouse or any other co-purchasers. The credit bureau's report will show how you have handled past debt and credit accounts, such as car loans, charge accounts with stores, and any purchases made on credit. If you have already seen your credit profile, you can rest assured there will be no surprises. Similarly, if the lender has welcomed your submission of documentation to establish a nontraditional credit history, you should already have a good idea of the lender's willingness to accept it, provided that the documentation is complete and shows you to be a dependable credit risk.

It is not unusual for the lender to ask you for a written explanation of any problems that appear on your credit report (although hopefully you have been able to clear them up prior to applying for your mortgage). Even one late payment on just one account usually requires an explanation by you. Don't be alarmed by this request. Just respond promptly with a truthful statement about whatever circumstances may have caused the late payment(s).

The "Four C's" of Credit Analysis

Capacity

Can you repay the debt? Lenders ask for employment information: your occupation, how long you've worked, and how much you earn. They also want to know your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.

Credit History

Will you repay the debt? Lenders look at your credit history: how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability: how long you've lived at your present address and how long you've worked at your present job.

Capital

Do you have enough cash for the down payment and for closing costs? Do you need a gift from a relative? Will you have a cushion left after your home purchase, or will you spend your last penny at settlement?

Collateral

Will the lender be fully protected if you fail to repay the loan? Lenders want to be sure the property you are buying is sufficient to back up your loan.

Some additional considerations:

You will not help yourself by trying to cover up past credit problems in hopes that the lender won't discover them. Rather you want to be completely truthful, but try to show that those problems are behind you. Again, it may be a good idea to ask for help from a nonprofit group, especially if you want to build a nontraditional credit history.

Verifications

The lender also will verify the information provided on the loan application as to your income and employment history, your assets (checking and savings accounts, etc.), and your rent payment history.

Approval of Mortgage Insurer

If you make a down payment of less than 20% mortgage insurance may also be a requirement of the loan and the loan will also have to be approved by the mortgage insurer. If you are obtaining an FHA or VA loan, the loan must also meet FHA/VA standards.

Locking in the current rate

If you are concerned that interest rates may rise during the time the loan is being processed, the lender may agree to lock in the current rate (and number of points) for a given period. Find out when the lock-in takes effect and how long it remains in effect, and get the lock-in agreement in writing. A lock-in for a very short time period may be useless; you want something that will protect you until your loan closes.

Speeding up the approval process

Be sure to respond promptly to the lender's requests for information while your loan is being processed. It's also a good idea to call your loan officer occasionally to check on the status of your application. You can then contact your employer or others who need to provide documents or other information for your loan.