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, there is no substitute for a direct discussion to get your questions answered.

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.  We have dozens of different loan programs each with their own set of special guidelines.

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.

Example: 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.

An Alternative form of credit could be your power bill or your cell phone bill.  Not all programs allow the use of these options.

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

…..

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 No!

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.

 

Mortgage Basics

Simply put, a mortgage is a loan secured by real property and paid in installments over a set period of time.

The mortgage secures your promise that the money borrowed for your home will be repaid.

According to Wikipedia:

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Components of a Mortgage:

1. Mortgage Approval:

Qualifying for a mortgage requires meeting a pre-determined set of guidelines established by a lender, which may include credit history, income, employment and assets.

In addition to personal qualifying factors, a property must also meet certain standards set by lenders before a borrower can obtain a mortgage loan secured by real estate.

2. Mortgage Payments

On a traditional 30 or 15 years fixed rate mortgage program that involves principal and interest, each payment made is divided into two parts (we’re not including taxes or homeowners insurance as part of this discussion):

The first part of the mortgage payment, which is commonly referred to as principal, goes to paying down the initial amount borrowed.

The second part is the interest paid for the money borrowed to purchase the property.

The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.

Other types of mortgage payments available can include options for paying interest only or a teaser rate.

Either way, it is extremely important to have a solid understanding of the full payment and terms before moving forward with a particular option.

3. Mortgage Programs

Mortgage Programs come in many different types of flavors and colors depending on the down payment and/or monthly budget a borrower has been approved for.

There are also federally insured mortgages, such as FHA or VA loans, which have more flexible qualifying guidelines.

4. Closing Costs / Fees

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate.  In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.

Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction to be aware of. Appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.

5.  Mortgage Rates

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.

Understanding Credit


Credit is one of the most important components in the mortgage approval process.

Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining what level of risk to assess to each lending scenario.

Down payment requirements, loan programs, flexibility on income and even interest rates can be impacted by a slight bump in a credit score.

According To Wikipedia:

A credit score in the United States is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts.

A credit score is primarily based on a statistical analysis of a person’s credit report information, typically from the three major American credit bureaus: Equifax, Experian, and TransUnion.

The Fair Isaac Corporation, known as FICO, created the first credit scoring system in 1958, for American Investments, and the first credit scoring system for a bank credit card in 1970, for American Bank and Trust.

The three credit reporting agencies in the United States of America, Equifax, Experian, and TransUnion, collect data about consumers used to compile credit reports. The credit agencies use FICO software to generate FICO scores, which are sold to lenders. Each individual actually has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.

In the United States, a resident is permitted by law to view their credit report once a year at no charge by visiting the website AnnualCreditReport.com. The individual’s “credit score” information is available for an additional fee from each of the three credit reporting agencies. In addition, the Fair Isaac Corporation sells FICO scores directly to consumers using data from Equifax and TransUnion.

A FICO score is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores near the right between 650 and 799.

Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history (35%), total amounts owed (30%), length of time (15%), type of credit (10%) and new credit (10%).

The largest impact on credit scores is payment history and amount owed, which is why it is important to pay bills on time.

Debt should be kept to a minimum and funds should be moved around as little as possible. It may be beneficial to leave all accounts open, even if they have a $0 balance.

Different types of credit (ie. mix of credit cards, installment loans and fixed payments) can also be beneficial to a credit score.

However, too many installment loans can negatively affect credit.

Although time is a necessary factor for improving credit scores, this can be controlled by keeping the accounts that are opened during the same time period to a minimum.

By following these guidelines over an extended period of time, credit scores can be maintained and improved in order to improve the borrower’s loan potential and interest rate.

Key Factors That Impact Your Score:

1. Payment History (35%)

It is essential to pay your credit bills on time. Every 30 days late, collection, judgment, or Bankruptcy significantly drops your score.

2. Amount You Owe Compared to Balances (30%)

Your available credit compared to the amount owed. It’s a good rule-of-thumb to be at 40% or less of the available balances

3. Length of Credit History (15%)

Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.  In fact, if you happen to have a card that is over 10 years old with even a little activity, it would probably be a bad idea to close that card.

4. Mix of Credit (10%)

Generally speaking, if you have loans, such as a car loan, as well as open credit cards, it helps prove to creditors that you have experience borrowing money.

5. New Credit Applications (10%)

There is a model that compensates for people shopping rates on home and car loans, but it can hurt your credit score to have multiple reports pulled in a short amount of time.

Factors That DO NOT Impact Credit:

  • Age
  • Race
  • Sex
  • Employment History
  • Income
  • Marital Status
  • If you’ve been turned down for credit
  • Length of time at current address
  • Whether you own a home or rent
  • Information not contained in your credit report

Establishing Credit:

Several factors can be used to establish credit initially, including bank accounts, employment history, residence history and utility bills.

Although they are not reported directly to credit bureaus, bank account history is important to lenders for first time loans and should be kept in good standing.

While they are also not reported to credit bureaus, utility bills (such as electric, telephone, cable and water) can also show a lender the risk associated with a new borrower.

Credit may be initially established through a bank, in which a credit card is linked to a specific amount of money deposited in the bank.  If the credit card is not kept in good standing, the bank can then take the secured funds for payment.

Initial credit may also be established with a department store credit card (for example), but borrowers should beware of the high interest rates associated with these cards and pay off the balances in full.