Understanding Mortgage Qualification
The initial step in buying a home is getting pre-approved. This formal process involves your lender running your credit report and issuing you with a document known as a pre-approval letter that outlines how much money the lender would loan you based on your income, savings, and debts. This letter will outline how much money is available based on these factors.
Pre-approval is essential when searching for a home, as most sellers won’t consider an offer without one. Being pre-approved allows you to move forward quickly in the home buying process.
It’s also an ideal way to gain more information about the mortgage you want and its terms, such as interest rates and PITI (principal, interest, taxes and insurance). Your lender can then give you the total cost of the loan including any down payment requirements, closing costs or additional charges you may encounter.
You must fill out a mortgage application, and your lender will run your credit report and assess your income to determine if you qualify for a mortgage. They also review your debt-to-income ratio as well as inquire about assets and savings.
Once your application has been reviewed, you will be contacted to arrange an appointment with a mortgage underwriter. They will review all of your financial documents, assess your credit report and score, apply federal guidelines for lending, check income and employment history – everything!
The underwriter will need to see your W-2 forms, last two pay stubs and tax returns for the past two years. Furthermore, they require access to bank statements for the last two months.
Your lender will first assess your assets to guarantee you have enough funds for a down payment and regular mortgage payments. They’ll also check accounts to make sure any large deposits come from legitimate sources and there are no outstanding debts on your credit reports.
This process may take several weeks to complete. The underwriter might require additional documentation, such as pay stubs or tax forms, before they approve your mortgage application. You may also have to have some of your down payment refunded or other conditions met before approval is given for the loan.
According to the loan type you’re considering, your mortgage underwriter may also require you to meet specific income criteria. While these standards vary from lender to lender, most prefer borrowers who have a stable job and enough income for them to cover the mortgage payments.
Another vital step of the underwriting process is verifying your debt-to-income ratio, or how much you owe on all bills. This percentage works out as a percentage of gross monthly income that goes towards debt obligations such as mortgage payments, rent, student loans, auto loans and credit card bills.