Mortgage Approval Process
Mortgage Approval Process
Apr 4th
Whether you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can be an over- whelming adventure without a proper road map and good team in your corner to help you put the puzzle
together. Ed & Barbara and The Heiser Team have made it their crusade to keep the Home Buyer educated, informed and up-to-date before, during and after the purchase process.
Updated program guidelines, mortgage rate questions and down payment requirements are just a few of the components you’ll need to be aware of when getting mortgage financing for a purchase or refinance.
While our site is full of useful information, industry terms and calculators that will help you research the mortgage process in detail, this particular page was designed to give you a thorough outline of the important components involved in getting qualified for a new mortgage loan.
Mortgage Approval Components:
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 such as FHA, VA, USDA, Jumbo or Conventional.
The following bullets are the main components of a mortgage approval:
Debt-To-Income (DTI) Ratio –
A borrower’s DTI Ratio is a measurement of their monthly credit and housing liabilities “Debt” TO their monthly “Income”.
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 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 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.
Credit –
Credit scores and history are used by lenders as a tool to determine the 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 your pre-approval letter before placing any offers on properties.
Mortgage Programs –
Whether you’re looking for 100% financing, low down payment or conventional lending options, 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.
Ed & Barbara are mortgage professionals that will take into consideration your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.
Pre-Qualification Basics:
Getting Pre-Qualified BEFORE looking for a new home with an agent is an essential first step in the home buying process.
Before we go any further lets clear some confusion. You may have heard some or all of these terms before: Pre-Qualification, Pre-Approval, CLA or Conditional Loan Approval, and now the more standard LSR or Loan Status Report.
Many times terms are misunderstood, interchanged or just simply not known. What a buyer wants to do FIRST is to get Pre-Approved. Besides letting the buyer know what they can REALLY afford to buy, they get an idea of their monthly payments, down payment requirements and loan program terms. When Pre-Approved the lender gives the buyers agent an LSR [the new version of the old Pre-Approval Letter] which gives the seller and agents involved a better sense of security and confidence that the purchase contract will be able to close on time.
A Pre-Approval in the form of an LSR is generally issued by the loan officer after credit has been pulled and gone over, income and asset questions have been addressed and some of the other initial borrower documents have been previewed. The LSR is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.
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 an LSR, the final Mortgage Approval Conditions List is given by the UNDERWRITTER after they have scrutinized the ENTIRE loan package. This not only includes the borrowers information but the purchase contract, appraisal, lender overlays etc. If more information is needed or clarifications, the underwriter issues a “Conditions List” that may ask for in addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This 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.
What’s Included In An LSR?
How Much Can I Afford?
Let’s start with the most commonly asked question about mortgage loans. Getting an LSR [Pre-Approval Letter] for a new home purchase is mainly to let everyone involved in the transaction know how much and what type of mortgage program the buyer is approved for from the lender.
The LSR is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.
A complete Pre-Approval 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 LSR
- 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
- Term – 30 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 or NOO
- Contact Info – Lender’s Name and Address
- Conditions – Document and Funding requirements prior to Approval
