Getting a mortgage is not the result of picking correctly in a financial shell game. It doesn’t matter if you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can seem overwhelming if you are not informed. It helps to be able to discuss it with someone you can trust (your banker or a reputable mortgage lender).
Updated programs 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. The new QM (qualified mortgage) rules that went into place in early 2014 have added more than a few items for underwriters to consider.
While this site is full of useful information, this page only serves to give you a broad overview of the process. It is strongly recommended that you avoid on-line calculators and speak directly with a local mortgage lender.
The Components of a Mortgage Approval
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 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, or 20% (LTV)
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.
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 a 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 bets fits your needs and goals.
The basics of getting a Pre-approval
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. Too many home buyers go out looking at homes before receiving the pre-approval. Without the information, you really don’t know what homes to view.
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. They are not one in the same.
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 the borrower fits within a particular loan program’s guidelines.
The Mortgage Approval Letter 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 Letter 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 a final Mortgage Approval Letter.
The Mortgage Approval Letter 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.
A pre-qualification letter is only valuable to the borrower.
It is usually available from a lender without any of the information being verified. Regardless of the wording, it really only says “If the information provided is correct, the holder of this letter can afford a mortgage loan of $XXXXX”. It is not considered to represent anything to anyone else. It is real estate paper created by hearsay.
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 bank.
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
- Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
- Status Date and Expiration Date – Most Pre-Approval Letter are good 90 days from when your credit report was run
- Mortgage Type – FHA, VA, USDA, Conventional, Jumbo
- Term – 40, 30, 20 or 15 year fixed, ARM or Adjustable Rate Mortgage; if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
- Occupancy – Owner Occupied, Secondary Residence, Investment
- Contact Info – Lender’s Name and Address
- Conditions – Potential prior to Approval, Document and Funding requirements
The ultimate level in loan approvals is having a pre-approval letter with conditions (#7), which may take a few days to weeks, depending on the amount of documents the underwriting staff has been able to look at and clear.
Frequently asked questions about the 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.
Worse 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.
Note from the MacArthur Group
We are not lenders. We do have strong relationships with several of them in our area. It is our hope that a brief overview, such as presented, will remove a little bit of the mystery and give you confidence when you first speak with a lender.
The MacArthur Group