Buying a home is a big commitment, and for most individuals, it will be the biggest investment they ever make. Therefore, it is only normal that issues regarding funding would come up, and one of the most typical inquiries will be: how much of an investment can you afford to make? The answer to this question is dependent on the individual’s current financial condition, which a lender evaluates during the very first step of the lending procedure, which is the application for a mortgage (also known as a home loan)
The process of obtaining a loan can be intimidating, it is beneficial to gain an understanding of the financial expectations before investing the time. A mortgage application is the first step in the process, during which a loan officer will evaluate your ability to repay the loan based on a set of predetermined criteria. Although every application for financing is different, the financial requirements are remarkably consistent. Now, let’s talk about the frequently asked questions of many mortgagors: what affects getting a mortgage approval? We’ve listed here 7 things, and many more for you to understand mortgage loans and its approval process.
1. Your Credits Score
Your credit score will be one of the first things a lender looks at when you apply for a mortgage. Your credit score is based on your history of borrowing money and how reliably you have made payments in the past. If you have a higher credit score, not only will you have a better chance of being approved for a home loan, but your interest rate will also be lower. You don’t need to be frightened or mystified by your credit score; you can check it and keep track of it through most online bank accounts.
Even while there isn’t technically a rate that you need to hit before being authorized for a mortgage, a normal mortgage lender will aim for a score of at least 620 in order to approve a borrower. If you want to secure a respectable mortgage, having a credit score of at least 750 is ideal, but it doesn’t imply it’s impossible if your score is lower than that.
If you have a low credit score and want to buy a home, it is likely that you will wind up paying a higher monthly mortgage payment for the whole duration of your loan. This is one of the many reasons why it is crucial to try to boost your credit score as much as possible before to looking for a mortgage. You can do this by paying down your existing debt, making your payments on time, and avoiding asking for new credit in the time leading up to acquiring your loan. It is important to play the long game.
Also Read: 7 Habits You Need to Upkeep Your Good Credit Score
2. Debt-to-Income Ratio
Lenders will look at your income in comparison to your current debts as well as your ability to handle the payments on those obligations before deciding whether or not to grant your mortgage application. Your ratio of debt to income is the term that describes this calculation.
Your debt-to-income ratio is determined by taking the sum of all of your monthly obligations, including school loans, credit card debt, vehicle loan debt, and other forms of credit, and dividing that number by your gross monthly income, then multiplying that number by 100.
Lenders gain a clear understanding of how you will be able to manage your monthly mortgage payments while also repaying any other debts you may have outstanding as a result of this information. Keep in mind, too, that the lending institution has the right to re-examine and evaluate your mortgage application at any point prior to the scheduled closing of your loan. In light of this, it is strongly recommended that you do not incur any extra debt or make significant purchases using your credit card prior to making a mortgage application and while your application is still being processed.
3. Value of the Asset
Lenders want to make sure they are lending money on a piece of property that is valuable enough to merit the amount of money they are lending. To phrase it another way, the house needs to be in decent shape and be worth more than the amount of the loan. An inspection is used to evaluate the state of the home, and an appraisal is used to determine whether or not the home is worth the asking price.
In the event that the inspection reveals significant flaws for instance, if there is evidence of water intrusion in a basement, the lending institution may insist that the problem be addressed and remedied prior to the completion of the loan. If the property’s appraised value is lower than the amount you are borrowing, the lender may decide not to approve the loan for the whole amount and may demand you to come up with additional funds for a greater initial deposit. This is the case if the loan amount is higher than the appraised value.
4. Your Savings and Investments
If you have a strong investment portfolio, the amount of money you have saved or invested can work in your favor and make you more money. Lenders will want to know exactly where your savings are located and for how long they have been there. They might request copies of your bank statements, investment statements, and retirement account statements, going back possibly as far as two or three years. This consideration is typically significant for retirees. In order to successfully receive a loan, it is essential to provide the recorded facts.
Also Read: Difference between Saving and Investing
5. Your Employment History
It is advisable to postpone the process of applying for a mortgage if you are considering switching careers or leaving your current place of employment in the near future. Lenders look at your employment history as a significant consideration and a measure of risk when deciding whether or not to approve your loan application. Lenders will be more likely to provide you a mortgage if they see that you have a history of consistent employment. This demonstrates that you have a reliable source of monthly income and that you are able to keep up with the payments on your mortgage. Lenders will want to know that you have been working at your full-time job for at least three months if you are applying for a loan to verify that you are no longer subject to a probationary period. If you are self-employed, lenders will require tax documents dating back at least two years in order to calculate an income average for you during that time period.
6. Your Residence
When applying for a new mortgage, a potential lender will look at how you managed your previous mortgage. If you have moved frequently, a lender may have reservations about giving you credit. A lender will be satisfied with your payment history if you have been consistent and on time with your payments. Stability and consistency are qualities that are frequently valued by lenders.
7. Key Documentation
The absence of required documentation is frequently mentioned as one of the primary contributors to the delayed processing time associated with mortgage applications and approvals. The easiest approach to get ready for the procedure is to become familiar with the important documents that your lender needs to examine in order to evaluate your application. These documents include an identification card issued by the government, a notice of assessments, tax records, recent financial statements, a letter of employment, pay stubs, and a description of the work you are now performing. If you get these documents organized in advance, the application process will go much more quickly, and you will receive guidance on how to proceed in the most effective manner.
How long does the mortgage financing procedure take?
The process of obtaining a mortgage loan often takes anywhere from six to eight weeks, depending on the lender. However, the amount of time needed to close can change quite a bit depending on the lender as well as the type of loan being taken out. When compared to mortgage firms, banks and credit unions typically require a little bit more time. Additionally, excessive volume can result in shifts in turn times. During the busiest months, it’s possible that closing on a mortgage will take longer than 60 days.
How will you know if your mortgage loan has been approved?
Once your loan has been authorized, your loan officer will typically give you a call or send you an email to let you know. Your loan processor might provide you with some encouraging information now and again.
Different Types of Mortgage Loan Approvals
There are three different types of approvals for mortgage loans. Pre-approval, conditional approval, and final approval.
1. Pre-approval
A loan officer will evaluate your financial situation, including your assets, income, and debts, as well as your credit history, in order to determine how much money you are eligible to borrow, what kinds of loans you might be approved for, and what kind of interest rate you might be looking at when it comes to paying for your home. This is what is meant by the term “mortgage pre-approval.”
Pre-approval for a mortgage, on the other hand, does not guarantee that you will be granted a loan for the property of your choice, despite what the name might imply. Rather, it is the process of determining how much money you are able to borrow in order to acquire a house or other property.
2. Conditional Approval
Conditional approval occurs when a mortgage lender is mainly satisfied with your loan application but requires you to meet certain extra criteria before you can be fully authorized for the loan. Full approval occurs when all of the requirements are satisfied. The fact that you have been conditionally authorized for a mortgage does not guarantee that you will ultimately be approved for the loan; rather, it merely indicates that the lender will offer you money once all of their requirements have been satisfied.
The mortgage application procedure is almost complete when the applicant receives conditional approval. In particular, after you have made an offer and submitted your loan application, but before to final approval, is known as unconditional approval.
2. Unconditional Approval
The ultimate decision of the lender to grant you permission for the loan is referred to as an unconditional approval. It indicates that they have considered all of your information and are content to lend you a certain sum of money to purchase a particular piece of real estate.
This is sometimes known as a “formal approval” or a “full approval,” depending on the context. It is best to be aware that both terms signify the same thing so that confusion is avoided.
In a nutshell, the condition of the property you want to buy, as well as your credit score, the ratio of your debts to your income, your job history, the amount of the down payment, key documentation, your residence, your savings and investments, value of the asset, all play a role in determining whether or not your application for a mortgage loan will be accepted. When it comes time to pay for your home, both you and your mortgage lender want the best for you in terms of your ability to do so successfully. If you pay close attention to each of these procedures, you will be able to ensure that you are completely ready when the time comes to move into your new house.
Also Read: Your Simple Guide to Housing Loans in the Philippines
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Written by Alfred Alaba
