Navigating the Mortgage Approval Process
Updated: Jan 29, 2022
Most people buy a property with mortgage financing. Do you know how to get a mortgage? Do you know when you need to apply for a mortgage and how the mortgage is processed and approved? Here are some guidelines to help you understand the mortgage approval process.
When do you need to apply for mortgage approval? Before you let your real estate agent show you properties, you need to obtain a bank preapproval letter so that you can show the seller that you have sufficient funds to purchase the property. If you do not have proof that you can get a bank loan to purchase the property, the seller may decide to sell the property to another buyer who has proof of financing. You can go any bank or mortgage lender to get the preapproval letter. The preapproval letter confirms how much money you are approved to borrow to purchase a home. The preapproval letter is not a loan commitment and it is valid for a certain period, generally for 90 days. Some banks offer an online preapproval process and you can get a preapproval letter as soon as within an hour. Your mortgage agent can help you get a preapproval letter as well. A qualified mortgage agent has extensive knowledge and can help you determine what type of loan is most suitable for you and can help you save money on your mortgage payments and save time in your mortgage hunt.
What information do you need to provide to obtain a preapproval letter from the lender?
· Your income information: Copies of your pay stubs or other proof of income for the most recent 60 or 90 days
· Current credit score
· Bank accounts information: Two most recent bank statements
· Down payment amount and desired mortgage amount
· W-2 statements and personal and business tax returns from the past two years
The credit score plays an especially important part in obtaining loan approval and determining your mortgage interest rate and payments. Mortgage lenders check your credit score using one of the three major credit bureaus: Experian, TransUnion, and Equifax. A lender will also consider your entire financial situation in determining whether to approve your loan and how much money you can borrow. Additional factors the lender will consider include your debt-to-income ratio and housing expense to income ratio. According to Experian, the categories of credit score ranges are as follows:
· 800 and above: Exceptional
· 740-799: Very good
· 670-739: Good
· 580-699: Fair
· 579 and below: Poor
An excellent credit score will not only help you obtain mortgage approval, it also dramatically reduces the mortgage payment. 620 is the minimum credit score for a conventional home loan backed by Fannie Mae or Freddie Mac. First time home buyers or military members have different credit score requirements for their loans. Under federal law, the three major credit agencies: Equifax, Experian, and TransUnion are each required to provide consumers with one free copy of their credit report each year. By visiting the website annualcreditreport.com, you can check out your credit score from these three agencies.
How can you improve your credit score? According to Fair Isaac Corporation (FICO), you can improve your credit score by the following actions:
· Payment History: Make sure to pay your bills on time by setting up payment reminders or automatic payments online.
· Amounts Owned: Keep your monthly credit balances as low as possible.
· Length of Credit History: Avoid opening new lines of credit.
· Credit Mix: Instead of opening a new credit card, focus on paying off your existing credit card debt and other loans as soon as possible.
· New Credit: When applying for credit, compare rates from different lenders and over different repayment periods if possible.
After your offer is accepted, the contract is signed, and the inspection is acceptable, you should immediately apply for your mortgage commitment. Your mortgage agent can help make the loan approval process smooth and efficient. The lender will process your loan application, go through the underwriting, and issue a mortgage commitment letter, which informs you and the seller that your loan is approved and can be closed on your purchase. The commitment letter states the type of loan, loan amount, terms, rate, and costs. Generally, the commitment is good for 30 or 45 days, also referred to as the rate lock or commitment expiration date.
You need to carefully review your loan commitment letter and confirm whether your loan commitment is a firm commitment or conditional commitment. A firm loan commitment letter states the lender will provide you a certain amount money under specific terms and it has an end-date. If you do not close the loan within the loan commitment period, the lender may charge you a cancellation fee. If the commitment time is expired, you may need apply for the loan again. The seller prefers a firm commitment because the lender has made a more definite commitment to fund the loan at the closing.
A conditional commitment letter means that the lender will offer the loan if the certain conditions are satisfied. Examples of conditions that may need to be satisfied before the lender funds the loan:
· Providing updated income or asset documents
· Documenting the source of your down payment
· Paying off outstanding debts to meet the debt-to income (DTI) ratio
· Providing proof of insurance of the subject property
· Providing proof of the sale of your current home if you are closing both your sale and purchase simultaneously
Conditions are usually issued by the mortgage company’s underwriter or underwriting department. Some lenders issue a mortgage commitment letter before the underwriting process. The underwriting department may consist of one person or a small group of team members that are responsible for obtaining and verifying all the information and documents necessary to provide final approval for the loan. Mortgage commitments, conditions and approval procedures may vary from one lender to another. Nowadays the mortgage underwriting process takes longer than before. Lenders are more cautious and unwilling to take as many risks because of the financial crisis, so they stringently scrutinize borrowers and their credentials. The sooner you satisfy the mortgage conditions, the sooner your loan will be approved.
The mortgage process generally includes preapproval, formal application, loan commitment, underwriting, conditions satisfaction, final approval, and funding/closing. Some lenders require you to supply detailed income, asset, debt, bank statements, and tax return documents before they issue a preapproval, and some may just ask for basic information before they issue a preapproval letter. If you have a long, stable employment history and an excellent credit score it may be easier to obtain a preapproval letter. After you sign the contract and supply all the documents that the lender requires, the lender’s underwriting department will scrutinize all your documents and evaluate your credit history and ability to repay the loan before they finally approve your mortgage. The final process is funding the loan and closing the real estate transaction.