Mortgage Approval Process
- Discussion of Goal and Objectives
- Application and Data Gathering
- Determine appropriate loan programs and pricing
- Issue Pre-Approval Letter if a purchase
- Submission to Lender
- Disclosures Issued, Signed and Returned
- Appraisal Ordered
- Clear outstanding underwriting conditions
- Order loan Docs
- Sign new Loan Documents
- Close on Time
This process does not have to be an overwhelming, whether you’re a First-Time Home Buyer or seasoned investor, the key is to have an experienced mortgage broker on your team to help you navigate the process.
Current program guidelines, mortgage rates, down payment requirements and equity are a few of the components we will discuss to make you aware of your options when getting mortgage financing for a purchase or refinance.
Mortgage Approval Components:
Mortgage lenders approve borrowers for a loan secured by real estate based on a standard set of guidelines that are generally determined by the type of loan program, i.e. conventional, FHA, VA USDA or their own internal portfolio guidelines.
The following are the main components of a mortgage approval at a 30,000 foot overview, underwriting guidelines are several 1,000 pages and the intricacies of all the issues addressed are far beyond the scope of this document, but that is why it is important to work with an experienced mortgage broker that deals with these issues and topics on a daily basis:
Debt-To-Income (DTI) Ratio
A borrower’s DTI Ratio is a measurement of their gross monthly income from eligible income sources to monthly credit and housing liabilities.
There are two ratio’s the lender is concerned with, the housing ratio and the total DTI.
Housing ratio – It takes into consideration the monthly mortgage payment, property taxes, hazard insurance, private mortgage insurance and Homeowner association dues.
Total or Combined Ratio –It takes the Housing payments and adds your other monthly credit obligations like car loans, credit cards, child support etc.
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, or LTV, is an expression or term lenders use to state the amount of loan(s) as an amount of the properties appraised value. For example if the appraised value of a property is $100,000 and the outstanding loan balance was $80,000, the LTV would be 80%.
Certain loan programs require a borrower to invest a larger down payments to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing with much lower down payment requirements, some with zero down payment or as low as 3.5%.
Lenders use credit reports reflecting the credit activity from all 3 major credit companies to determine the credit profile of the borrowers and are used 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.
Typically, the higher the credit scores, the more favorable financing a borrower can obtain.
This section covers 1-4 residential units. The property type and occupancy of the residence play 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 a low down payment option 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 which do not require as much equity, as well as conventional, jumbo and portfolio financing.
A Platinum Mortgage Advisor takes into consideration your individual LTV, DTI, Credit, Property Type and goals associated with the loan scenario to shop your loan across our database of lenders 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 the essential first step in the home buying process.
Let’s start with the most commonly asked question about mortgage loans.
How Much Can I Afford?
Obtaining a Pre-Approval Letter before shopping for and making an offer to purchase a new home gives you the confidence that you can afford the home that you are buying and lets all the other parties in transaction know you are a qualified buyer and can perform under the terms of the purchase contract.
The Pre-Approval Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.
The difference between a Pre-Approval Letter and a Final Mortgage Approval Conditions List:
It is important to understand that the Pre-Approval letter is not final loan approval, the final loan approval will be in the form a Mortgage Approval Conditions List that is typically more detailed because it is generated by an the lenders underwriter and they are reviewing the entire loan package as submitted.
The Pre-Approval Letter is generally issued by a mortgage broker after credit has been pulled, income documents reviewed and assets verified and the loan application ran through an automated underwriting engine to determine the eligibility or conditional approval of your loan request.
The Pre-Approval Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines and is subject to an acceptable appraisal and an acceptable title report of the subject property.
Even though questions about gaps in employment, discrepancies on tax returns, bank statements and other qualifying related details should be addressed before the Pre-Approval Letter is issued, the final Mortgage Approval Conditions List is where these conditions will pop up.
In addition to borrower related conditions, there are property inspection issues, purchase contract updates and appraised value issues that may show up on this list. This will also list any prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.
7 Key Elements of a Good Pre-Approval Letter
- Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
- Status Date and Expiration Date – Most Pre-Approval Letters are good 90 days from when your credit report was run
- Mortgage Type – FHA, VA, USDA, Conventional, Jumbo, Other
- 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
- Occupancy – Owner Occupied, Secondary Residence, Investment
- Contact Info – Lender’s Name and Address
- Conditions – Document and Funding requirements prior to Approval
Typical Paperwork Required
- Most Recent 2 years Personal Tax Returns (1040’s) – all pages and Schedules(Federal Only)
- K-1’s you may receive from partnerships or investments, all pages (Federal Only)
- Bank Statements – 2 most recent months, please include all pages
- Investment or Retirement account statements, please include all pages (i.e. 401k)
- Homeowners Insurance – Copy of recent statement for subject property or name of agent
- Mortgage statement – current statement for subject property
- Copy of Driver License(s)
Self Employed Income not reported on Schedule C: (applies when you own more than 20% of a business):
- Business tax returns (1120’s or 1065’s) most recent 2 years – all pages and schedules (Federal Only)
- Year to Date Profit Loss
- W-2’s for 2010 and 2011
- Paystubs covering the most recent 30 days (typically 2 paystubs)
Purchase Transactions, Retirement Income & Miscellaneous:
- Purchase Agreement – copy of the fully executed Purchase Agreement
- Realtor – Name and contact information of your realtor
- SSI or Retirement Awards Letter if available
- Child Support or Alimony – If obligated to pay, please include a copy of the divorce decree