First-time home buyers seem to find the mortgage approval process confusing.
Here are 6 Steps to Mortgage Approval:
- Mortgage Pre-Approval: the lender reviews your situation and determines how much they are willing to lend you
- House Hunting and Offer: the home buyer locates a home, negotiates the price and sign a purchase agreement.
- Loan Application: the loan borrower completes a loan application with information about the home
- Mortgage Processing: the loan processor gathers the information needed for the loan and creates a file.
- Mortgage Underwriting: the underwriter analyzes the loan file to determine whether it should be approved or denied.
- Approval and Closing: The underwriter issues a final approval, and the home buyer attends closing to finalize the deal.
A Closer Look
Mortgage lenders approve borrowers for a loan secured by real estate based on standard guidelines. Pre-Qualification starts the loan process. Once a lender has gathered information about the borrower’s income and debt, they determine how much the borrower can pay for a house. Let’s look at the different components that these guidelines suggest:
- Debt-to-Income Ratio measures the income of the interested buyer to monthly credit and housing liabilities. The lower the DTI ratio a borrower has, the more confident the lender will be to lend the money. The ability of the borrower to repay the loan and willingness to repay the loan will play a huge part on the lender’s approval.
- Loan-to-Value is a term used by the lender when comparing the difference between loan amount and property value. Certain loan programs require the borrower to invest a bigger down payment to avoid mortgage insurance. Some government loan programs were created to help buyers secure financing on a home with a 96.5% to 100% LTV ratio. For example, a conventional loan requires the borrower to purchase mortgage insurance when the LTV is more than 80%. To avoid paying mortgage insurance, the borrower would have to put 20% down on the purchase of a new property. On a $100,000 purchase price, 20% down would equal $20,000.
Credit Scores and credit history are used by lenders as a tool to determine the estimated risk associated with a borrower. Lenders like to see multiple lines of credit with a minimum 24 months reporting history.
Property Type: The type of property and how you plan on occupying the house, plays a major role in securing mortgage financing. Do to some Home Owner Association restrictions and government lending mortgage insurance requirements and appraisal policies. It is extremely important to understand the details and restrictions of the pre-approval letter before placing any offers on a property.
Mortgage Programs: Whether you are looking for 100% financing, low down payment options, or turn the costs of upgrades into a rehab loan, every mortgage program will have its own guidelines to qualify.
There are also government-insured loan programs such as FHA, USDA, and VA home loans, conventional and Jumbo financing. The loan officer will take into consideration your individual LVT, DTI, credit, and property type scenario to determine which loan program will best suit your needs and long term goals.
Pre-Qualification Letter Basics
It is essential to have in hand your qualification letter prior to initiating the home buying process. The pre-approval letter gives the seller and agents involved a sense of security that the purchase contract will be able to close on time. Note that the difference between a Pre-Approval letter and a mortgage Approval condition list is that the Pre-Approval letter is a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines. As for the Mortgage Approval Conditions list is a bit more detailed. You will find all the information of employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details that should be addressed prior to the issuance of the Pre-Approval letter. Additionally, there are inspections clarifications, purchase contract updates, and appraised value debates that may show up on this list.
What’s in a Pre-Qualification Letter?
A complete Pre-Approval letter lets the borrower know the terms of the loan amount, monthly payment, and down payment requirements, including principal, interest, taxes, insurance, and any additional mortgages insurance premiums.
7 Items to Look For in a Pre-Approval Letter
- Loan amount
- Status date and Expiration date (Most Pre-Approval letters are good for 90 days from when your credit report was run.
- Mortgage type-FHA, VA, USDA, CONVENTIONAL, JUMBO
- Term- 40,30,20, 15 year fixed, Adjustable Rate Mortgage (1,3,5,7 or 10 years initial fixed period; interest only)
- Occupancy (Owner occupied, secondary residence, Investment
- Contact Info (Lender’s name and address
- Conditions-Document and funding requirements prior to Approval
Tips to Improve Your Credit Score
- Pay your bills on time
- Keep balance low on credit cards
- Limit your credit accounts to what you really need. Accounts that are no longer needed should be formally canceled since zero balance accounts can still count against you.
- Check that your credit report information is accurate.
- Be conservative in applying for credit and make sure that your credit is only checked when necessary.
Hope this helps and inspires you to understand better the job of our loan officers.