What It Takes To Obtain A Mortgage Approval
The mortgage approval process varies from state to state, and in most cases, it can be an overwhelming journey. That’s why whether you are buying your home for the first time or if you are a seasoned industry player, you need an experienced real estate expert by your side.
There are certain factors that you’ll need to familiarize yourself with during this process, and it would be best if you learned about them sooner. For instance, there are mortgage rate questions, requirements for a down payment, and mortgage program guidelines that get updated periodically.
It would help if you were well informed about all these factors when seeking mortgage financing. To help you understand the basics of mortgage approval, what to expect throughout the process and how to make informed decisions, we prepared this piece with all the fundamental components of getting approved for a mortgage loan.
The Basics of Mortgage Approval
For you to be approved for a mortgage loan, there are standard procedures that usually determine the type of loan you’re applying for. A specific real estate generally secures mortgage loans. Below are the basics of a typical mortgage approval:
Debt-To-Income (DTI) Ratio
A debt to income ratio measures a borrower’s overall income per month against their monthly credit and housing spendings. If the borrower has a low DTI ratio (which translates into more income and high credit payments), the lender will be confident in your ability to repay the loan on time according to the borrowing terms. This can accelerate your mortgage approval process.
Loan To Value (LTV)
Loan to value, otherwise known as LTV, is a borrowing term used by lenders to compare the overall value of a property and an outstanding loan amount. Depending on your loan program, an LTV may be applicable to avoid mortgage insurance. In such cases, you’ll be required to pay a larger down payment. However, some government loan programs are designed to assist borrowers in obtaining mortgage financing with an LTV ratio of between 96 to 100 percent.
One such loan program is the Conventional Loan which allows a borrower to secure mortgage financing if they have an LTV that is above 80 percent. The borrower can then invest a down payment of 20% to avoid paying mortgage insurance. For example, if a property is valued at $100,000, the 20 percent down payment would translate into $20,000 or an LTV ratio of 20% this a conventional loan.
Another vital component of mortgage approval is the credit score. Lenders use credit score and borrowing history to determine the possible risks of loaning to a borrower. The higher the credit score and loan payment history, the more confident a lender will be in your application. However, some loan programs enable borrowers to work with other credit forms to qualify for a mortgage loan.
Type of Property
The type of property you’re planning to purchase and your overall plans to occupy it significantly influence your chances of getting mortgage approval. HOA restrictions, appraisal regulations, and insurance requirements for government mortgage lending are essential details which your realtor or agent should be aware of before putting out a property on sale. Be sure to go through the pre-approval letter with your agent or realtor before continuing with the process.
Mortgage Loan Programs
Every mortgage loan program has specific guidelines. These guidelines apply whether you need 100% property financing, low options for down payments, or if you’re looking to secure funding for renovations within a Rehab loan program. However, government-insured loan programs, like conventional loans, jumbo financing, FHA, USDA, or VA home loans, are slightly different.
When applying for mortgage approval, the lender will need to consider your DTI and LTV ratios, your overall credit score, and the type of property you wish to purchase to determine the type of loan program that suits your needs, financial ability, and goals.
The Basics of a Pre-approval Letter
The first step in a homeownership acquisition process is obtaining a mortgage pre-approval or qualification letter. The pre-approval letter provides the seller and the agent with an overview of the borrower’s monthly expenditures, the down payment options, and the terms of the loan program to budget accordingly. The letter also gives the seller a sense of security and reassurance that the purchase will go according to the contract and in time.
However, it’s important to note that a Pre-approval Letter and a Mortgage Approval Conditions List are two different documents. A Pre-approval Letter is used when the borrower’s details, such as income and assets, and credit scores, have been reviewed.
Ideally, the Pre-approval Letter is a mortgage professional’s official affirmation that the borrower fits the requirements for the loan program and qualifies for the mortgage loan. On the other hand, a Mortgage Approval Conditions List is a detailed document that addresses all critical guidelines for mortgage approval such as bank statements, tax compliance, employment gaps, updates of the property purchase contract, appraised value, and similar details.
Particulars of a Mortgage Pre-approval Letter
As already noted, the Pre-Approval Letter is based on the guidelines for the loan program as per the borrower’s DTI, LTV, credit score, type of property, and status of occupancy.
A complete Pre-Approval Letter should inform the borrower of the down payment requirements, monthly payments, taxes, interest, principal interest, insurance, and other loan terms. Sometimes there may be a difference in the amount you qualify for and what the mortgage lenders have in their budget. Your realtor or agent should be able to help you understand these differences. However, the six most crucial particulars to look for in a Mortgage Pre-approval Letter include:
- Loan Amount: Total loan amount. (Applicable in VA, FHA, USDA)
- Mortgage Type: For Conventional and Jumbo loans, VA, FHA, USDA.
- Loan Program Terms: A fixed period between 15 to 40 years may contain Adjustable Rate Mortgage or ARM. If there’s an ARM, then it may have a 1 to 10 year fixed period with interest.
- Status and Expiration Date – Some Pre-Approval Letter can remain valid up to 90 days from the date your credit report was issued.
- Occupancy – Owner occupied or secondary residence? Investment property?
- Contact Information – Lender’s official information and contact details plus official conditions. Should indicate if the borrower qualified for approval. Should state the required documentation before funding.
As you can see, the process of getting approved for mortgage financing is quite complex and requires due diligence. However, if proper procedures are followed, you can obtain approval and funding in no time.
The idea is to work with a qualified and experienced realtor who’s well versed in the process. If you’re looking for mortgage approval for your ideal property, talk to us for guidance. Whether it’s your first time or you are looking to acquire another property in or around Sonoma County, we have the expertise and experience to walk with you every step of the way.