In processing your loan, the lender will primarily focus on two areas:

1. The property that you plan to purchase (because it serves as collateral for the loan)
2. Your financial situation and credit history (because they will determine your ability and willingness to repay the loan)

The lender will request an appraisal of the property, order a credit report for you and any co-borrowers, and verify the information in your loan application. Review each step below:

The lender will arrange to have a professional appraiser estimate the market value of the house you plan to buy. The lender is interested in the value of the property because it serves as collateral for the loan. The lender wants to ensure that the value of the home will support the amount of your mortgage. The appraiser looks at the present value and how the neighborhood may affect the future property value. The appraiser evaluates the property's age, structural soundness, and other physical characteristics. Location factors such as surrounding homes, access to transportation, even how zoning and taxes may affect the property in the future is also evaluated. Your lender will not loan you more than a given percentage of the value of the property (called the "loan-to-value ratio"). Once completed, the appraiser will send the appraisal forms to your lender.

Your lender will order a credit report for you and if applicable, your co-borrower to verify information you've supplied on your application, and your history of past debt and credit accounts. A credit report supplied by a credit reporting agency will report how much you owe, how often you borrow, and whether you pay your bills on time. All of these things can help the lender understand how well you might repay a mortgage loan. If there are any issues on your credit report, your lender may ask you for a written explanation. Just provide a prompt, truthful statement about what caused the late payment. If you know you have a credit problem, let your loan officer know upfront, rather than waiting until your credit is pulled.

Your lender will verify employment information and bank (savings and checking) accounts. Usually, the lender will send forms to your employer asking about your job history and current salary. Your lending institutions will also be notified to verify your assets (checking and savings accounts, etc.).

If you currently rent, your lender will send a Rental Verification Form to your current and former landlords to inquire about your rent payment history. If you currently have a mortgage, the lender will send your mortgage lender a Request for Mortgage History Rating. That rating will provide your lender with information on how you handled mortgage payments in the past.

Usually, your loan cannot be more than 95 percent of the appraised property value or 95 percent of the sales price of your home, whichever is less. If the appraised value is less than the purchase price, the amount of your mortgage may be less than anticipated. A larger down payment could be necessary or renegotiating the asking price with the seller.

If your down payment is less than 20 percent of the purchase price, your loan will generally require mortgage insurance. If mortgage insurance is required, the loan will need to meet underwriting standards of the mortgage insurer. If you are obtaining a Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Rural Housing Service (RHS) loan, it must meet those standards as well.

To ensure that your mortgage application is processed in a timely manner, it is important to provide accurate information during your loan application interview. If your lender checks your credit history, employment or current bank account balances and finds discrepancies, your application could be delayed.

Be up front with any past credit problems. Your explanation of why loan payments were late or how a bankruptcy was handled will help your lender fairly assess your loan application. Your honesty and cooperation in promptly providing required documents will make the application process run smoothly.

Your mortgage loan file is designed to provide information the lender needs to evaluate the risk involved in lending you money. Lenders look at the "four C's" of Credit — capacity, credit history, capital, and collateral.

Lenders follow industry guidelines that specify how much of a mortgage you can qualify for based on your monthly mortgage payments and total monthly debts. Your monthly mortgage payments (including mortgage principal, interest, taxes, and insurance) should not exceed 28 percent of your gross monthly income and monthly debts (including your mortgage payment) should not exceed 36 percent of your gross monthly income. A lender may be willing to lend you more based on your individual circumstances.

Can you repay the debt? Lenders ask for employment information: your occupation, length of employment and income. They are also interested in your expenses, how many dependents you have, whether you pay alimony or child support, and any additional financial obligations.

Will you repay the debt? Lenders look at your credit history: how much you owe, how often you borrow, whether you pay your bills on time, and whether you live within your means.

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

Will the lender be fully protected if you fail to repay the loan? Lenders must ensure the value of the property you are buying is sufficient to back up your loan.

Lenders are required to explain in writing their decision to deny credit. They have 30 days from the submission of your completed application to tell you if and why your loan was denied.

Perhaps your loan application was rejected on the basis of a credit bureau report. Or the lender's qualifying formula shows that you have insufficient income or too much debt to afford the house you are proposing to buy. In either case, there are steps you can take. If you are refused credit because of a poor credit rating, you are entitled to a free copy of the report from the credit reporting agency (CRA). Most credit history information is collected and kept by 3 national credit bureaus, Experian, Equifax and Trans Union. These organizations are not affiliated with the government and are for-profit entities. Any credit report errors can be challenged and you can insist the CRA include your side of any unresolved credit disputes in the report. If your credit history is not adequate, you should begin repaying debts. Once your credit profile is improved, you may be in a position to begin house hunting and apply for a mortgage loan again.

The Fair Credit Reporting Act enforced by the Federal Trade Commission is a federal law that requires credit reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information. To learn more about the act, visit: www.ftc.gov

The Fair Housing Act prohibits housing discrimination on the basis of race, color, religion, sex, disability, familial status, and national origin. To learn more about the act visit: www.hud.gov

You should also consider the following:

If you have insufficient funds for closing costs and a down payment, or insufficient income to afford the house you want, you should investigate alternative financing arrangements. Fannie Mae®, has designed a wide range of loan programs for low-to moderate-income borrowers, including its Community Home Buyer's Program(SM), Fannie 97® (a 3 percent down payment loan), Housing Finance Agency Programs, and others. These loan programs allow a lower down payment, more flexible underwriting ratios, and a nontraditional credit history.

If you have credit problems, seek the help of a nonprofit credit counseling agency.