Friday, December 2, 2022

What Factors Go Into Mortgage Approval

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Sort Your Paperwork To Speed Things Up

How To Get Approved For A Mortgage Fast [Mortgage Approval Tips]

Lenders need proof of your income before they can offer mortgages, so it makes sense to get your paperwork together in advance. Sending all the paperwork in one batch speeds up the process as it reduces the chances of your application being reviewed by more people.

If your lender won’t accept PDFs, uploads or printed internet bank statements, you may need your bank to send you original copies. Ask for these a few weeks in advance in case you need to wait for the originals to arrive.

Your lender may want to see any or all of:

  • Your last three months’ bank statements
  • Your last three months’ payslips
  • Proof of bonuses/commission
  • Your latest P60 tax form
  • Your last three years’ accounts or tax returns
  • Proof of deposits
  • ID documents
  • Proof of address
  • A gift letter. If you’re getting deposit help, the lender needs to know it is a gift , and that the giver won’t part own the home.
  • Mortgage Offers Can Help You Save

    There are several national and state programs that can help you save money on your mortgage. Spend time researching what you qualify for, as well as what restrictions apply, to see if you can get a better deal.

    Many state and local governments offer first-time homebuyer programs which encourage residents to buy within their home state. The Energy Efficient Mortgage program is ideal for people looking at green homes, while FHA 203 loans might suit you if you want a fixer-upper. If you’re buying in a rural area, see if a U.S. Department of Agriculture loan may be right for you. Veterans or active-duty servicemembers, or members of the Guard or Reserve, may be eligible for a VA loan which can help save them money with low or no down payment options and no mortgage insurance requirements.

    What A Mortgage Pre

    Once you have been pre-approved for a mortgage, you will receive a pre-approval letter or certificate. You can then use your pre-approval letter as proof to sellers that you will be able to afford the home purchase or use the pre-approval amount to help guide you on your home search. Your pre-approval letter will include information such as:

    • Your preapproved mortgage amount: This is the maximum amount that the lender is willing to let you borrow.
    • Home price: This is the maximum price of a home that you can afford to buy based on your down payment.
    • Mortgage interest rate: This mortgage rate is locked in for a period of time. If you apply and are approved for a mortgage within this period, you are guaranteed to have this rate, even if market rates have increased.
    • Expiry date: Mortgage pre-approvals usually have a rate lock that expires in a certain period of time, from 60 days to 120 days. After this date, your mortgage rate is no longer guaranteed.
    • Mortgage type: Your letter will show what mortgage terms your pre-approval was based on, such as the amortization, mortgage term, and LTV ratio. Your pre-approval letter may also specify your down payment and monthly mortgage payment amount.

    Read Also: What Does A Fixed Rate Mortgage Mean

    How Much Income Do You Need To Buy A Home

    Your income is one of the most important factors lenders consider when you apply for a mortgage. But theres no minimum amount of income youll need to buy a home. Instead, lenders look at your debt-to-income ratio, which shows the percentage of your gross monthly income that goes toward debt obligations.

    What the lender would be reviewing when issuing a pre-approval is what we call DTI, which stands for debt to income ratio, said Polina Solis, a Realtor in Texas. There are certain loan packages, such as conventional versus FHA, which have different DTI requirements. Generally speaking, you dont want to have your home monthly payment be more than 30% of your gross income.

    There are two ratios lenders will look at. Your front-end DTI is your future monthly housing expenses compared to your gross monthly income. Your back-end DTI is all of your debt payments, including your housing payments, compared to your gross monthly income.

    An acceptable DTI to purchase a home depends on other factors, including your credit score. But according to Solis, lenders generally require that borrowers have a DTI of no more than 45%. In some cases, they may be willing to allow for as high as 50% if the borrower has exceptional credit and additional cash reserves.

    When To Get Preapproved For A Mortgage Faqs

    What Goes Into Your Mortgage Rate? Many Factors

    Do mortgage preapprovals affect your credit score?

    When you apply for mortgage preapproval, the lender will run a credit check, or a hard inquiry. Hard inquiries do appear on your credit report and they can temporarily lower your score.However, credit reporting agencies treat multiple mortgage inquiries within 14 days as one inquiry, so applying for preapproval with several lenders at once so you can compare their offers should not drastically hurt your score.

    What is the best way to get preapproved for a mortgage?

    You can start your preapproval within minutes through a lenders website. Have financial documents such as bank statements, W-2 forms, pay stubs, and tax returns ready to upload to move through the application faster. Expect to authorize the lender to do a credit check as well.If you already have a house in mind, you may be asked for the property address and details about property tax and homeowners insurance estimates. But its OK if you dont have these. The important information at this point is your employment, financial, and credit history.

    When should I get preapproved for a mortgage?

    Get preapproved as soon as youre ready to buy a home. If youre scrolling Zillow for fun, dont bother just yet. But once those home listing binges get serious, its time to talk to a lender.

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    What Does A Preapproval Letter Include

    A preapproval letter includes your name, the price of the home you gave when requesting the preapproval, the loan amount youre preapproved for and the expiration date of the preapproval. Some lenders also include conditions related to the preapproval in the letter, such as it only applying to a single-family home instead of multi-family property.

    Employment And Income History

    When you apply for a mortgage, lenders go to great lengths to ensure you earn a solid income and have stable employment. That’s why lenders request two years’ worth of W-2 tax forms and contact information for your employer. Essentially, lenders want to ensure that you can handle the added financial burden of a new mortgage.

    Youll also be asked to provide salary information, so a lender has evidence that you earn enough money to afford a mortgage payment and related monthly housing expenses. You’ll also have to provide 60 days of bank statements to show you have enough cash in hand for a down payment and closing costs.

    Read Also: What Is Mortgage Rate Vs Apr

    Everything A Homebuyer Needs To Get Pre

    Bottom Line PersonalConsumer ReportsPrevention

    As you search for a home, getting pre-approved for a mortgage can be an important step to take. Consulting with a lender and obtaining a pre-approval letter provides you with the opportunity to discuss loan options and budgeting with the lender this step can serve to clarify your total house-hunting budget and the monthly mortgage payment you can afford.

    As a borrower, its important to know what a mortgage pre-approval does , and how to boost your chances of getting one.

    Consider Other Associated Costs

    Can you get a Mortgage Approval using only Pay Stubs?

    As you go through the mortgage process, it’s important to think about the true cost of owning a home. Besides the costs required at closing and regular mortgage payments, there are other recurring costs such as property tax, home insurance, heating costs, condo fees and more. Even though pre-approval specifies an amount you may be approved for, consider a lower principal amount to reduce regular expenses while leaving money for other unforeseen expenses.

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    Make A Bigger Downpayment

    Each loan type comes with a minimum downpayment amount. The lender wants to see that the home buyer has money invested in the transaction. The more money the buyer has invested, generally, the more likely they are to make their payments.

    A higher-than-required downpayment is a strong indicator of a committed buyer. For instance, paying five percent down on an FHA loan, which only requires 3.5%, can turn a turned-down application into an accepted one.

    Likewise, making any downpayment on a VA loan even one percent can result in approval.

    What Should I Get Preapproved

    In todays housing market, it will be almost impossible to get a seller to consider your offer unless you have a mortgage preapproval . There are simply too many buyers for sellers to be willing to take a chance on one who hasnt at least talked to a lender about getting a mortgage.

    Another important reason to get preapproved: It gives you an idea of how much home you can afford based on how much money a lender is prepared to let you borrow. This can save you time during house hunting by eliminating properties out of your price range.

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    What Is Mortgage Preapproval

    A mortgage preapproval tells you two things. First, whether you qualify for a home loan. Second, how much home you can afford.

    The mortgage preapproval process is a lot like what youd see when you apply for a home loan.

    • Submit financial documents and give a lender permission to run your credit
    • The underwriting team vets your finances
    • If you meet guidelines, theyll issue a preapproval letter stating how much they may be willing to loan you.

    Its essentially a full approval minus any property-related requirements.

    Once you find a home and a seller accepts your offer, youll move into the processing stage again. But this time, that includes a home appraisal and title search. The lender may also request updated financial documentation if its been a while since the original preapproval.

    But none of that can happen until you have a sale contract for a home. And to get to that point, you likely need to get preapproved.

    Heres a tip: You may be able to buy a home with a prequalification or prequal. But a prequal is a best guess at your approval status. In todays market, you want a full preapproval.

    Get Information From A Source You Trust

    What Goes Into Your Mortgage Rate? Many Factors

    It’s natural to have questions. Besides the basics such as the interest rate and term, it’s a good idea to ask about other things like prepayment charges if you plan to sell your property or pay down your mortgage loan faster. To ensure that you get accurate, actionable information we recommend seeking answers from a trusted source. TD Mortgage Advisors are well versed in every aspect of the mortgage process and can be an easily accessible source of information.

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    Rejected Stop Before You Make Another Move

    If you’re rejected FREEZE! Don’t automatically apply again with a different lender. Too many applications will mess up your credit score, so don’t do it. Instead, the first thing to do is to check your credit file again. Could you have missed something?

    At all costs, avoid the rejection spiral. The nightmare example works like this:

  • You apply
  • You get rejected
  • You apply elsewhere
  • This continues, until finally you check your files and get the error corrected. So…

    • You apply again
    • You’re rejected because of recent ‘searches’

    If you’re rejected once, immediately go to the top of this guide and follow the steps we’ve set out, or you may mess up your score as more applications mean more searches, which will compound the problem.

    If you haven’t missed anything and your credit file’s still looking good, it could just be that the lender you applied to had its own reason for turning you down. It’s worth asking the lender why.

    It should indicate to you the main reason you were turned down and will tell you if that was your credit file.

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    How Long Does Mortgage Approval Take

    Once youve found a home, the length of time it takes for your mortgage to be finalized will depend on the conditions that need to be fulfilled. In most cases, a mortgage application can be turned around within a couple of days, sometimes the same day if your application is solid. From there, youll need to make sure any conditions agreed to by the buyer and seller in the Offer to Purchase are fulfilled prior to the possession date.

    Recommended Reading: What Does A Cosigner Do For A Mortgage

    What Is A Mortgage Pre

    A mortgage pre-approval is a written contract with a mortgage lender that lets you lock in a certain term and interest rate and gives you an estimate of yourmortgage limit. While it does not guarantee that you will be able to borrow the entire mortgage amount, it is usually a reasonable estimate and can help guide you in your home buying process. Some home sellers also request a mortgage pre-approval to make sure that buyers can afford their homes and wont have to drop-out later due to financing problems.

    A mortgage pre-approval does not last forever, however. You will usually have 60 to 120 days to close on a home purchase and sign a mortgage agreement at the locked-in interest rate. If you take longer than the agreed amount of time, you may get a different interest rate.

    Should I Tell My Real Estate Agent How Much I Am Pre

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    To help tailor your home search,your real estate agentwill ask for your price range and may even ask to see your pre-approval letter. You can let your real estate agent know the maximum amount that you have been approved for, but it is more important to let your agent know the maximum home price that youre willing to look at. Just because you have been pre-approved for a large number doesnt mean that you need to purchase a home for that amount. While your agent might want to know your price range, you also do not need to let them know your income or how much money you have.

    Read Also: What Salary Is Required For A Mortgage

    Two Weaknesses Cant Be Overcome

    Dont mistake this as an excuse to have both bad credit and a high debt ratio and still get approved. Thats next to impossible. Lenders look at applications with both of those negative factors as much too risk. Two financial irresponsible factors are too much for any lender to handle.

    Compensating factors are meant to overcome one weakness, while helping to make the other positives in your financial profile even more positive. Chances are, though, if you have two weaknesses, such as a bad credit score and a high debt ratio, you wouldnt have any compensating factors to fall back on anyways.

    Requirements For A Mortgage Approval

    Tom Drake | September 10, 2020

    Buying a home can be an exciting, yet stressful time for many Canadians. Thankfully, some advanced planning can make life a lot easier. This includes an understanding of whats required to get your mortgage approved. In this article, well show you how to qualify for a mortgage, and share some helpful tips so when the time comes, youll be ready.

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    Mortgage Prequalification And Mortgage Preapproval Aren’t The Same Thing

    Mortgage prequalification and mortgage preapproval are steps most people take before making an offer on a house. However, they aren’t the same thing.

    Being prequalified or conditionally approved for a mortgage is the best way to know how much you can borrow. A prequalification gives you an estimate of how much you can borrow based on your income, employment, credit and bank account information.

    Preapproval comes from a lender who has analyzed your finances carefully. They’ll tell you how much you may be able to borrow and what your interest might be. Mortgage preapproval is usually done after prequalification, but before you find a home. Preapproval doesnt guarantee you’ll get a mortgage, but if all key factors stay the same it’s very likely.

    Add Up Total Monthly Debts

    10 Factors To Consider While Availing A Personal Loan ...

    The very first step is to calculate what your monthly debt total is, which will be impacted by the DTI calculation you need. If its your front-end DTI, or housing expense ratio, youll add up expenses involved with maintaining your home: mortgage principal and interest, homeowners insurance, HOA fees and property taxes.

    Principal + Interest + Property Taxes + Homeowners Insurance + Association Dues

    If youre interested in your back-end DTI to see the bigger picture, youll want to include all applicable debt payments. This means adding in those same household expenses from a moment ago as well as things like student loan payments, minimum credit card payments, car payments, HELOC payments and the like.

    Monthly Housing Expenses + Other Monthly Debts

    This gives you an idea of your total debt burden.

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    You Could Be Closer To Approval Than You Think

    A mortgage applicant is often in a better home-buying position than their application suggests.

    Their payments are high compared to their income, but they have strong credit or a lot of money in the bank.

    Or, they spend very little on luxuries, and save everything.

    These mortgage application strong points are known as compensating factors, and they can help you get approved, even when standard rules say you shouldnt be.

    There are almost an unlimited number of compensating factors depending on a mortgage applicants situation from a high credit score to a track record of saving money.

    Some mortgage programs, such as the HomeReadyTM program, have written compensating factor guidelines. Borrowers can use income from roommates and boarders to help their loan approval, for example.

    Examine your situation, whether you have been turned down, or are applying for the first time. Ten common compensating factors can help you become a homeowner sooner than you expect.

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