Whether you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can be stressful and feel overwhelming. If you are working with good team, it will make everything go much more smoothly.
These are some of the things that a lender looks at in deciding to approve a loan.
Debt-To-Income (DTI) Ratio –
A borrower’s DTI ratio is a measure of their monthly income versus the monthly credit and housing payments.
The lower the DTI ratio, (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future.
Loan-to-Value (LTV) –
Loan-to-Value, or LTV, is a measurement between the new loan amount and the property’s value. (ex. a loan amount of $80,000 and a property value of $100,000 would be an 80% LTV)
Some programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs allow buyers to finance a home with an LTV of 96.50% (as little as 3.50% down payment) and zero down payment (100% LTV) on a USDA loan.
Credit scores and payment history are used by lenders to determine the estimated risk associated with a borrower. The lower the credit score, the higher the risk there is for future default.
Credit Inquires –
If you have had recent inquires on your credit report, a lender may check to see if any new credit has been extended that may not yet actually appear on your report. An inquiry could be for something minor such as a new cell phone, but can also be something that will impact your ability to qualify for the loan such as a car payment or another loan that you co-signed to help out a family member.
The type of property and how you plan on occupying the residence also play a role in underwriting. For example a loan on an owner occupied home is a lower risk than a home that someone is buying for a rental property. A condominium is considered a higher risk than a single family home.
Mortgage Programs –
Whether you’re looking for 100% financing, low down payment options or want to roll the costs of upgrades into a rehab loan, each mortgage program has its own particular qualifying guidelines. Not all guidelines are the same for all programs.
There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.
Getting a pre-approval letter prior to looking for a new home is an essential first step in the home buying process.
Besides letting you know what amount of a loan you will qualify for, a Pre-Approval Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will be able to close on time.
There is a big difference between a Pre-Approval Letter and a Pre-Qualification Letter.
The Pre-Approval Letter is issued by a loan officer after an application has been taken, credit has been pulled and borrower documents, for income and asset verification have been viewed. The Pre-Approval Letter is loan officer’s written communication that the borrower fits within a particular loan program’s guidelines. This critical, not all loan officers do this well and will issue a preapproval when the borrower does not qualify. Obviously this causes great stress and pain for all involved. Make sure to only work with a trusted mortgage professional who has the knowledge and experience level that is needed.
A Pre-Qualification Letter usually only means the loan officer has taken an application but may not have even obtained a credit report or seen any income or asset verification. If none of these have been done, then there is a much higher risk for everyone that the loan may not be eventually approved.
What Should be in a Pre-Approval Letter?
The Pre-Approval Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.
A complete Pre-Approval Letter should let the borrower know the exact terms of the loan amount and down payment requirements.
Keep in mind, one of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.
7 Items to Look For On a Pre-Approval Letter
- Loan Amount
- Status Date and Expiration Date
- Mortgage Type
- Contact Info
Frequently Asked Questions – Mortgage Approval Process:
Q. Why do I have to obtain another Pre-Approval Letter from a different lender when I make an offer on a particular home?
Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender – who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.
In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they’ve selected has a back up plan should their current one fall apart.
Q. I was pre-approved, but after I found a home and signed a contract, my lender denied my loan. Why?
There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute and then after the fact in some unfortunate instances.
With the borrower – credit scores, income, employment and residence status can change.
With the property – appraised value, poor inspection report, title transfer / property lien issues, seller cooperation, HOA disclosures.
With the mortgage program – Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements…. the list can go on.
One big reason that I see all too often, the loan officer did not do a good job in the preapproval process and/or did not do a good job in foreseeing potential stumbling blocks.
Q: Do I have to sell my current home before I can qualify for a new mortgage payment?
You will have to qualify with both your current mortgage payment and your new mortgage payment. This is difficult to do for most people.