What You Need to Know About the Mortgage Application Process
There are several things you need to know about the mortgage application process, from preapproval to closing. Understanding how the process works can help you speed up the mortgage approval process and get a loan approved faster.
During the preapproval process, lenders take a look at your income, assets and credit to determine how much they can lend you. They also calculate your debt-to-income (DTI) ratio and other criteria that affect your home loan qualifications.
Preapproval
Preapproval is a step that lenders use to verify your financial information and creditworthiness. It’s also a great way to show sellers that you’re a serious buyer and give yourself some extra bargaining power when it comes time to put in an offer on a home.
Mortgage preapproval typically takes between a few days and several weeks, depending on your credit history. You may need to provide additional documents, such as pay stubs, tax returns or bank statements, for your lender to process your application.
The loan process can take longer for borrowers with a lot of debt or a low credit score. However, a lender will likely be able to speed up the preapproval process if you can provide all of your financial documentation in one place and can prove you have enough income to cover monthly expenses.
Once you have been preapproved, it’s a good idea to shop around for mortgage rates and find the best rate for your specific situation. You may also want to apply for a “rate lock” from your lender. A rate lock guarantees you the interest rate you get for a set period of time (usually 30 to 60 days) after your application is approved.
Getting preapproved can help you avoid making financial moves that could make you appear more risky to lenders, such as applying for new credit, missing mortgage or credit card payments or taking on too much debt. It’s also a good idea to work on improving your credit score and debt-to-income ratio before you apply for a mortgage.
You can apply for a preapproval letter with many different types of lenders, including banks and credit unions. The most important thing is to shop around, as each lender has its own criteria for approving preapproved applicants.
When you’re preapproved, you’ll receive a letter that states the amount of the mortgage you can qualify for and the terms of the loan. You can use this to help you determine a budget for your search. You should stick with this budget as long as you’re able to find a home within that price range, though.
Keep in mind that your mortgage approval can be revoked if your financial situation changes significantly between the time you’re preapproved and the time you buy a home. This is especially true if you make a large purchase, apply for another loan or miss payments on existing loans.
A mortgage preapproval letter usually has an expiration date, which you should be aware of when you’re shopping for a home. This is why it’s important to begin your house-hunting process sooner rather than later after you’ve received your preapproval letter.
If you have been declined for a mortgage, it’s not uncommon to be asked why the loan was denied. Sometimes, this is due to a mistake on your credit report or an error on the lender’s system. In other cases, the lender may have overlooked an important aspect of your application or a change in your financial circumstances.
Home loan qualification criteria
When it comes to buying a home, there are some key requirements that lenders will have you meet. These criteria vary from lender to lender and also based on the type of mortgage you want. The VA and FHA mortgage programs, for example, have a different set of qualifications than conventional loans.
Credit scores are another important factor for a mortgage. These numbers, which range from 300 to 850, determine how likely a lender is to approve your loan and the interest rate you can get. A higher score means better chances of getting a lower interest rate, which can help you save money over the life of your loan.
Besides your credit score, lenders look at your income and debt-to-income ratio before giving you a mortgage. These figures are calculated by dividing your monthly debts, including your new mortgage payment, by your gross monthly income. Lenders generally want your total monthly debt to be no more than 43% of your gross income.
Your income can come from a variety of sources, including employment and self-employment. For employment, lenders want to see steady income and proof of a long work history. For self-employment, they will ask for two years of tax returns from your business.
If you have a job that offers benefits, lenders will want to see those as well. They will also want to see that you are not currently receiving any disability or unemployment benefits.
Many mortgage lenders will require you to provide your most recent pay stub and two months of bank statements. You may need to also provide your most recent tax returns and W-2 forms.
Other factors that can affect your ability to qualify for a mortgage include the property you’re purchasing and the location you live in. A lender will typically take the appraised value of the house you’re interested in and compare it with your monthly income. The difference will be used to calculate how much you can afford in monthly payments.
In addition, a lender will check your down payment and consider how much it can afford to pay to insure your loan against losses if you default on the mortgage. This can include the up-front mortgage insurance premium and annual mortgage insurance premiums for FHA loans.
For conventional loans, down payments can be as low as 3.5% of the purchase price of your home. This is a huge benefit for first-time buyers.
However, some lenders will have you make a down payment of 10% or more of the home’s purchase price. This can be an even better deal for those with a high credit score and a strong income.
Ultimately, the lender will be able to make a decision about whether you qualify for a mortgage after reviewing your application and supporting documents. It’s a good idea to be prepared for the process ahead of time.
Credit score requirements
Credit scores are an important part of the mortgage application process. They give lenders a quick snapshot of your credit history, including whether you pay your bills on time and how much debt you have. They are also a good way to see how much your interest rate will cost you.
Your credit score is calculated by the FICO scoring model, which interprets your credit history and assigns a score based on how well youve handled your financial obligations. The higher your credit score, the easier it will be to get a home loan and lower your interest rate.
The credit score requirements for a mortgage vary by lender and loan type, but the minimum you need to qualify for most conventional loans is 620. For a jumbo loan, youll need a credit score of 700 or higher.
But your credit score isnt the only factor that goes into your loan approval. Lenders also consider your income, employment history and debt, along with the amount of the mortgage youre requesting and your down payment amount.
You can find out your credit score for free by contacting the major credit reporting agencies, which are Experian, Equifax and TransUnion. Normally, you can request a free credit report once per year from each of the bureaus.
Your credit utilization rates how much of your available credit youre using can also affect your credit score. Its best to have a lower credit utilization rate, which is generally 30% or less.
If you have a high credit utilization rate, try to pay down your balances or increase your credit limits so that your overall credit utilization is lower. Increasing your credit limit can also help improve your credit utilization rate and raise your credit score.
In addition, you should avoid applying for a lot of new credit at once. This could negatively impact your DTI, which is a key factor for mortgage lenders.
Another important factor in determining your credit score is the number of inquiries made by lenders on your credit report. When you apply for a new line of credit, such as a car or a credit card, it will show up on your credit report and can make a big difference in your credit score.
Having multiple lines of credit open at once can be detrimental to your credit, so its a good idea to close any open accounts as soon as possible.
A low credit score can mean you will need a co-signer or be required to come up with a larger down payment. Its also likely that youll be charged higher interest rates and a higher mortgage insurance premium.
You can work on improving your credit score before you start shopping for a home, by paying off old credit cards and reducing your debt. It may take a while for your score to improve, so be patient and dont rush into purchasing a home until your credit is strong.
