Home Loan Background Checks
Getting a loan to buy a home is an extensive process involving a formidable stack of papers that must be reviewed, filled out, and signed. The reason for this is because a large amount of money is exchanging hands, and the loan company needs to make sure the applicant is going to be able to pay it back. A part of this process is the applicant background check.
There are a variety of mortgage loans that people can apply for, depending on their situation. Some mortgage loans are designed for specific types of homes, such as manufactured home loans, condo loans, multi-family home loans, and jumbo loans — those exceeding the conventional loan amount. Then, there are loans involving governmental assistance, such as Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veteran Affairs (VA) loans.
But no matter what type of loan someone applies for, all applicants will have to submit to a background check to determine whether they will be approved for the loan and what their interest rate will be. The degree and extent of the check will vary depending on the type of loan. For example, a background check conducted on someone applying for a VA loan usually only involves verifying their service and their ability to make payments, whereas someone applying for a jumbo loan may have to undergo a more thorough check and meet stricter requirements because of the size of the loan.
Background checks on individuals applying for a home loan will evaluate the person’s credit history and credit score, verify the person’s current employment status, and verify the person’s identity.
Loan companies will examine an applicant’s credit history to see how consistently they have made payments on previous loans and their current bills, determine the amount of debt they have acquired, and see their credit score, all to decide how financially responsible they are. The applicant’s eligibility for the loan and the amount of interest they will have to pay once they are approved will depend on their credit history.
“We pull the person’s credit report because we have certain credit score requirements,” John Frels, sales manager and residential loan officer with Envoy Mortgage (and former president of the Greater Houston Association of Mortgage Brokers) said. “For FHA loans, we usually look for minimum credit score of 620, which will generally result in an interest rate of around 3%. For a conventional loan, you don’t want to have a credit score under 700, otherwise you’re going to get hit with a much higher interest rate,” he said.
Loan companies will look into an applicant’s employment status to verify their income and make sure they have a job. This information is often combined with the individual’s credit history to determine their likelihood of being able to make their loan payments.
“We submit a Form 4506 — a request for a copy of their tax return — for every applicant to make sure the income they stated on the loan application matches their W2,” Frels said. “We also do a verbal employment verification on either the day of or the day before the signing, in which we call their employer to make sure they still have their job.”
Loan companies will need to verify that the applicant is who they claim to be for their own sake, as well as to fulfill the legal requirements of the Patriot Act Disclosure. All financial institutions are required to verify and record the identity of an individual before granting them a loan. This is to prevent the funding of terrorists and money launderers.
“The Patriot Act Disclosure requires us by law to verify and document a person’s driver license number and social security number — greencard information for non-citizens — to make sure we’re not lending money to a terrorist organization,” Frels said.
So, individuals applying for a home loan can expect to spend hours filling out and signing a tall stack of papers and submitting to a background check. All of this must be done to protect the personal interests of the loan company and to abide by the laws regulating financial lending.