What is the Mortgage Approval Process?

Whether you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can be a slightly overwhelming adventure without a proper road map and good team in your corner.

Updated program guidelines, mortgage rate questions and down payment requirements are a few of the components you’ll need to be aware of when getting mortgage financing for a purchase or refinance.

While this site is full of useful information, industry terms and calculators that will help you research the mortgage approval process in detail, this particular page was designed to give you a thorough outline of the important components involved in getting qualified for a new mortgage loan.

Mortgage Approval Components:

Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.

The following bullets are the main components of a mortgage approval:

Debt-To-Income (DTI) Ratio

A borrower’s DTI Ratio is a measurement of their income to monthly credit and housing liabilities.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Loan-to-Value (LTV)

Loan-to-Value, or LTV, is a term lenders use when comparing the difference between the outstanding loan amount and a property’s value.

Certain loan programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing on a home with 96.5% to 100% LTV Ratios.

EX: A Conventional Loan requires the borrower to purchase mortgage insurance when the LTV is greater than 80%. To avoid having to pay 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

Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a borrower.

While lenders like to see multiple open lines of credit with a minimum of 24 months reporting history, some loan programs allow borrowers to use alternative forms of credit to qualify for a loan.

Property Types

The type of property, and how you plan on occupying the residence, plays a major role in securing mortgage financing.

Due to some HOA restrictions, government lending mortgage insurance requirements and appraisal policies, it is important that your real estate agent understands the exact details and restrictions of your pre-approval letter before placing any offers on properties.

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 qualifying guidelines.

There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.

A mortgage professional will take into consideration your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.

Pre-Qualification Letter Basics:

Getting a mortgage qualification letter prior to looking for a new home with an agent is an essential first step in the home buying process.

Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms to budget 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 Mortgage Approval Conditions List.

The Pre-Approval Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documents have been previewed. The Pre-Approval Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.

The Mortgage Approval Conditions List is a bit more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.

Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before a loan officer issues a Pre-Approval Letter, the final Mortgage Approval Conditions List is where all of those conditions will pop up. In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.

What’s Included In A Pre-Qual Letter?

How Much Can I Afford?

Let’s start with the most commonly asked question about mortgage loans. Getting a Pre-Approval Letter for a new home purchase is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrower from the lender.

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, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.

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

  1. Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
  2. Status Date and Expiration Date – Most Pre-Approval Letters are good 90 days from when your credit report was run
  3. Mortgage Type – FHA, VA, USDA, Conventional, Jumbo
  4. Term – 40, 30, 20 or 15 year fixed, ARM (Adjustable Rate Mortgage); if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
  5. Occupancy – Owner Occupied, Secondary Residence, Investment
  6. Contact Info – Lender’s Name and Address
  7. Conditions – Document and Funding requirements prior to Approval

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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 is this a common trend that I hear about?

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.

It’s important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team throughout the entire process so that they’re aware of any delays or changes in your status that could impact the final approval.

Q. What happens if I can’t find a home before my pre-approval letter expires?

Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days of income and asset documents, as well as have a new credit report pulled.

Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.

It’s important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction out several months.

Q: Do I have to sell my current home before I can qualify for a new mortgage payment?

Yes, No and Maybe…

If you are in a financial position where you are qualified to afford both your current residence and the proposed payment on your new house, then the simple answer is Yes!

Qualifying based on your Debt-to-Income ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgages payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

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Related Articles – Mortgage Approval Process:

Private Mortgage Insurance, Yuke! How can I get rid of it?

What is private mortgage insurance and why do I need it? Private mortgage insurance is insurance purchased by the borrower for the lender to protect the lender in case the borrower defaults on the loan. Studies have shown that the less money someone puts down on a loan, the more likely they are to default. Whenever you get a conventional loan and have put less than 20% equity, the lender will require that you purchase private mortgage insurance or mortgage insurance (MI) for short on their behalf. A conventional loan is generally referring to loans that are not government loans and follow Fannie Mae or Freddie Mac guidelines. Twenty percent equity is either referring to a 20% down payment on a purchase or having 20% equity in your home when you refinance. It is calculated using the Loan to Value (LTV) ratio. So, if you put $20,000 down on a home purchase of $100,000, you get an 80% LTV. This is calculated as follows: $80,000 / $100,000 = 80% or Loan / purchase price or appraised value, whichever is lower.

So, if the property you are buying or refinance is worth $100,000, you will have to either put $20,000 down or you will be required to purchase mortgage insurance. Today, there are loan programs that will go up to 97% LTV. The higher the loan to value, the more expensive the mortgage insurance will be.

Mortgage Insurance is seen as a necessary evil. If you don’t have a 20% down payment, you can’t get a loan without it.
Okay, I get it. Now how do I get rid of it?

The Homeowners Protection Act o f 1998 (HPA) covers single family primary residences and allows for homeowners to request to cancel their mortgage insurance for loans that we closed on or after July 29, 1999. Sounds simple enough, but here is how it works. The lender will automatically remove the mortgage insurance once the loan balance is first scheduled to reach 78% based solely on the initial amortization schedule. This could take anywhere between 4 and 15 years depending on interest rate and term of the loan. Mortgage Insurance will only be cancelled if the borrower has good pay history.

On the other hand, you can request in writing for the lender to remove the MI once the principal has been paid down to 80% of the original purchase price or appraised value if it was a refinance. Mortgage Insurance will only be cancelled if there are no subordinate liens, the borrower has good pay history and the lender feels the property has not declined in value.

You can also request for the lender to go off the current value of your home by requesting a new appraisal of which you will have to pay for. To do this, loans need to be in place for at least 2 years. If the loan been in place for 2 to 5 years, the Loan to value must be less than 75%. If the loan has been in place for more than 5 years, the loan to value can be 80% LTV or less.

If you have mortgage insurance, contact the mortgage company that is collecting your payments and ask them what their requirements are for removing MI. These are general guidelines and a particular lender could have tighter guidelines than what is described above.

Lastly, the premiums that you pay for mortgage insurance could be tax deductable. If you refinanced or purchase a home in 2007 or after, the mortgage insurance you pay may be tax deductable depending on your adjusted gross income. As of now, Mortgage insurance is tax deductable through 2011. Consult with your tax professional to determine if you qualify.
George Beylouny is the Branch Manager for Silverton Mortgage Vinings.

Am I Lendable?

Can I get a Loan?

This is a great question, especially in today’s tough lending environment. Today, everything is on sale when it comes to real estate, but for most of us, we will need some assistance in the way of a mortgage to help finance home ownership. When I sit down with a client, I go over the 4 C’s of lending with him. The 4 “C’s” of lending are Credit, Collateral, Cash to close and Capacity to repay. Each category is a very important part of the loan process and anyone of them is reason for a lender to turn him down. Now the best part is that when working with a knowledgeable Loan Originator, if you are not able to qualify for a loan today, he will set up a road map so you will be able to do so in the near future.

The First “C” of lending is Credit. When applying for a loan, a lender is going to pull your credit report from all three major credit bureaus: Equifax, TransUnion, and Experian. Credit scores range from 350 to 850 and in order to qualify for a loan today, you will typically need a minimum between 620 and 640. In order to qualify for the best rates, your middle credit score will need to be at least 740. You can get a copy of your credit reports for free at www.annualcreditreport .com. In order to get you score with the free report, you will have to pay a small fee. So what does a credit score mean? In simple terms, it rates the likelihood that you will pay your loan back. So, the lower the score, the less likely you are in the lenders eyes to be able to repay the loan and thus will most likely have to pay a higher rate or put more money down.

“C” number two is collateral or the property itself. As part of the loan process, an appraisal will be ordered to come up with a value for the home you want to buy. If you are to get a loan, the house should be worth at least as much as you are paying for it. If not, the lender is on going to lend based on the amount of the purchase price, so you will have to make up the difference. Now the value is just one issue with the appraisal. The second is the condition of the property. Most loan programs want the property to be in at least average condition. If the property requires a lot of repairs, the lender may require those items to be corrected before the loan can close and if you are buying a bank foreclosure, the bank may not be willing to do this.

The third “C” is Cash. In order to buy a property today, you will need a required amount of money to execute the transaction. We will have to source and season the funds. This is done by reviewing your most recent two months of bank statements. All large deposits must be sourced and come from an acceptable place. A refund for you taxes is acceptable. Money you have been saving under your bed is not.

The final “C” is the Capacity to repay or Income. You must have some source of stable income. This can come from a job, retirement or disability to name a few. It must be ongoing with the likelihood to continue for at least 3 years. Income is one of the toughest parts of a loan document and much time goes into determining how much income can be used. Lenders use the DTI or Debt to Income ratio to determine your maximum loan amount. The ratio needs to be below 50% and is calculated by taking your total monthly expenses (those that show up on your credit report) and your new mortgage and dividing that number by your gross monthly income. . So if you total monthly expenses are $3,500 including the new mortgage payment and you make $10,000 a month, your DTI will be 35%.

If the four “C” can meet the requirements required of the loan program, you should be in great shape to qualify for a home loan today!

By George Beylouny – 678-428-6514, george@mgatl.com