For Loan Seekers, Preparation Is More Important Than Ever

One of the reasons many subprime loans have failed is because of weak underwriting, a new study suggests.

Underwriting is the process by which a lender decides whether a borrower is a good risk. It involves looking carefully at the paperwork provided by the borrower, including the signed loan application, bank account statements, paycheck stubs, tax returns, and profit-and-loss statements if the borrower is self-employed, and reviewing the property appraisal obtained by the bank.

The underwriting also includes a process called "verifications." The loan officer is supposed to call your bank and verify how much cash you have in your account. He or she is supposed to call your employer to verify your employment history and income information. If the facts you've put down in your application can't be verified, the loan officer is supposed to reject the application.

This isn't what happened in the subprime market. In some cases over the past several years, if a borrower's information couldn't be verified, the loan became a "stated income" or "no doc" loan. The borrower simply paid a higher interest rate and fees, and limited or no verifications were performed.

As a borrower, you want the lender to be sure you're qualified to borrow the amount you have in mind. You want to know exactly how much you'll owe each month, and for how long.

Underwriting the loan is arguably the most important thing a mortgage lender can do, and we've all seen the results of poor underwriting: a high rate of foreclosures and defaults.

When choosing a mortgage lender, whether you choose a broker or a banker, you'll want someone who can do the job right. Finding a lender who will take the time to make sure you understand the different loan programs being offered and will help you decide which best meets your needs is key to having a smooth closing.

How do you find a good lender? As with finding a good real estate agent, start by gathering recommendations from your friends, relatives and colleagues. If you are working with a real estate lawyer, he or she should have the names of loan officers who do a good job for their clients. Your real estate agent, if he or she is a pro, will have a list of mortgage lenders with which the company does business.

Beware of real estate agents who refer only one mortgage broker or lender, particularly if that lender is an in-house mortgage broker. The in-house lender may not be bad, but you need to make sure you find the best lender for your circumstances and needs, not the lender that may yield the greatest benefit to the real estate agent's company.

You should also consider a credit union, if you belong to one or can join one. Credit unions typically offer some of the least expensive loan programs, whether you're looking for a mortgage or a car loan.

Once you compile your list, do some research to make sure that the loan officers and mortgage companies are in good standing in your state and that there are no outstanding complaints against them through the Better Business Bureau ( http://www.bbbonline.org).

Next, start calling the loan officers to chat about how long they've been in the business, how many mortgages they're working on and your own situation.