In a world, there would be no reason to have mortgages. Everyone would have enough money in the bank that they could pay cash for a house. However, in reality, this is not happening, and many people turn to mortgage loans to help them purchase their dream home. The problem is that many people do not understand how mortgages are approved. This can cause problems if incorrect information is given to the mortgage lenders when applying for a mortgage loan.
Homebuyers generally have three stages of getting approval: income, assets, and credit. Each step is analyzed as a factor of the overall goal to approve the mortgage. When you are strong in all three departments, you are called a “stretch,” You will likely get the approval (unless there are insufficient funds to complete your loan). If you have two strong areas, but 1 area is lacking, it becomes a little difficult, but there is still a good chance of approval.
However, the mortgage rule depends on the lenders and the type of loan. So unless and until you apply for a mortgage, you cannot figure out the result of your application.
In this article, we will understand how to get things in our favor and make the lender approve our loan as soon as possible. We will first learn how to analyze if we are a stretch or not and then what types of factors lenders look for during the mortgage approval process.
How Do I Know If My Mortgage Will be Approved?
First, you have to understand your income and assets. By knowing these figures, you can figure out whether or not you can afford to purchase a house or not. If your income exceeds the loan amount, then there is a good chance that you will get approval. However, if your income does not exceed this amount, then there is a high possibility that you may get rejected.
It is recommended that you always look at your finances and financial history before applying for a mortgage. This will help you to determine if you are in a position to apply for a loan or not.
You will have the chance of getting your mortgage approved if :
- Your credit score is high.
- Your debt-to-income ratio is low.
- You have a good income and assets.
- You can show the lender that you can easily afford your monthly payments even if there is an economic slowdown or unemployment in the market.
When submitting a mortgage loan application, you must present all your financial information to your bank to be accurate with your figures. Therefore, you can get yourself better chances of approval by getting all financial information presentable and accurate.
However, remember that the rules of mortgage approvals are different for everyone. Various lenders in Texas have their own rules and regulations for approving mortgages. Some lenders are lenient, and some are strict when it comes to approving mortgages.
If you get rejected by one lender, do not get discouraged and keep trying until you find the right type of lender that will approve your loan.
So if you are still not sure if you will qualify for a loan, your best bet is to ask your lenders about your mortgage approval chances directly. You can generally get your eligibility confirmation for mortgage pre approval within 1 or 3 days. You will know how much loan amount you can afford and which home will suit your needs.
Mortgage Approval Process
You have to go through the mortgage approval process to get a home loan.
Once you have a signed agreement and you have chosen a mortgage lender, you will go through loan pre approval.
This process works as insurance for the lender that they are not lending more than you can afford to repay.
Loan pre approval is your opportunity to prepare yourself financially so you can show or prove that you qualify for a mortgage loan.
Documents needed for a Mortgage loan
The documents require when applying for a mortgage loan may vary from one lender to another, but they generally include:
- Your current statement of income and employment letter from your employer stating your position at the company
- Your tax return information from the past three years
- The names, addresses, and phone numbers of your bank(s)
- Details about how much you have in savings
- Your credit report
- Personal information such as your Social Security Number or alien registration number if you are a foreign citizen
Sometimes the lender will ask for additional documents according to their criteria. So, check with your lender what they require before preparing your documents.
Approval and underwriting
For most home buyers, the waiting period before acquiring a mortgage is lengthy. However, once the seller has accepted your offer, the next step is mortgage underwriting.
At this point, a lender will investigate your credit and financial background to determine whether or not you should be allowed to take out a home loan. Keep in mind that different lenders demand different types of information to complete the underwriting process.
You may also need to submit documentation such as:
- Proof of income
- Your last two years' tax returns
- Bank statements for the past three months
- Employment history
You must respond to all the requests on time. If you cannot do so, your lender may lower your credit score and could reject your loan application because of this delay. Hence, remember to arrange all these documents before you start applying for your mortgage. This way, you will save yourself time and energy. You should also keep in mind that many lenders want to see three years' worth of financial history.
Credit Check
Your lender will send a hard inquiry to each major credit-reporting agency to ensure your credit score hasn't changed since you were pre-approved. But, if your credit was processed during the pre approval stage, they will most likely only send a soft inquiry. This soft inquiry is essentially a request for your credit score and won't affect it.
So it's essential to check your report before you apply. If anything needs to be updated or fixed, you can make the corrections in time for when your lender requests the information. If the discrepancies don't get fixed in time, you risk being rejected for your mortgage loan.
It's also crucial not to open any new lines of credit or borrow any money throughout the underwriting process. If you've put in the time and effort to establish excellent credit, borrowing before mortgage approval may affect the final result.
Approval vs. pre approval
Although loan pre approval and mortgage approval are interrelated, they are not the same. Mortgage pre approval is when your lender agrees to finance you for a specific amount after examining your credit score and financial documents.
When you make an offer on a property, your loan officer will send you a preapproval letter valid for 60 to 90 days, which you may show the seller when making an offer. Pre Approval generally occurs during the house-buying process's early phases.
Having a preapproval letter in hand is helpful because it shows the seller you are serious about buying and may help to speed up your offer. Ask if your lender can guarantee a preapproval letter before closing. Otherwise, you will probably have to go through the approval process, which could delay your closing date and any potential savings. Furthermore, pre approval establishes the maximum price range for houses that you can afford.
Pre Approval vs. pre qualification
Prequalification and preapproval are helpful tools for purchasers looking to buy a house or homeowners who want to refinance their mortgage.
When you're pre-qualified by a lender, you're given an estimate. After the lender has reviewed your financial and credit information, you can expect to see your estimated loan amount and monthly payment.
However, pre approval is a more thorough process that considers additional factors such as how much you have saved for a down payment and costs for homeowners insurance, taxes, and closing fees. This lets you know if you'll be able to afford the home you are planning to purchase.
Mortgage Approval With FHA Loans
The Federal Housing Administration's rules for FHA loans are less restrictive. For example, they allow loan approval with a credit score as low as 500.
FHA loan in Texas have been created to help those who have a poor credit history buy their own home. But if you are missing payments all the time, make sure you keep up with them before applying for FHA loans.
To be approved for an FHA loan, the only thing you have to qualify for has a 580 credit score. This means that you can be approved for a loan with minimum income without proving your credit score.
But you must also remember that FHA loans are maximum adjustable-rate mortgages. This means that the interest rates are set to increase after a certain period.
Mortgage Approval With VA Loans
Like FHA loans, VA mortgages are guaranteed by the federal government. However, VA loans can offer more flexible requirements thanks to this insurance from the U.S. Department of Veterans Affairs.
Texas VA home loans offer a simple way to buy a home with little down payment and no private mortgage insurance requirement. The VA does not set the least credit score, but lenders will still run your credit and look at your income and the amount you want to borrow (debt-to-income ratio).
VA loans also allow co-signers, which may help you get approved with a lower credit score or limited credit history.
How to Increase Your Mortgage Approval Chances
If in case your debts are high or your credit score is low, you can take steps to increase your chances of getting approved.
- If your score is too low, obtain a copy of your credit report and ensure all the information listed is accurate.
- Check for errors and request corrections from creditors and collection agencies if needed. You can work on improving your credit before you apply for loans through these three simple steps:
- Pay down credit cards and other accounts on which you're carrying a balance.
- Inquire about lowering your interest rate through a personal loan or credit card refinancing.
- Consider requesting a secured credit card, which requires the deposit of cash for the line of credit.
- Try to save as much as you can to have enough money for a larger down payment.
- Contact your local mortgage lenders or credit union before you apply to determine if they offer a prequalification letter, a step above a preapproval letter.
- Choose a loan with flexible requirements and low closing costs so that it's easier to qualify for the best possible interest rate.
Read here to know some effective tips to get home loans for first time home buyers.
Conclusion
It's important to remember that getting a mortgage is the most significant financial decision in our life. You will likely be approved for the loan, but certain factors may affect your chances of getting approved.
Ensure that you know which factors are most important and how they affect the outcome. Organize all your monthly expenses and set up a budget that includes a plan to pay off debts. This will help you increase your chances of getting approved by lowering your debt-to-income ratio and freeing up more of your income to use towards the mortgage.
So, If you want to get the best out of your home purchase and take advantage of all the benefits it has to offer, be patient when dealing with your mortgage lenders and be honest about your financial situation.
If you need more information, contact a local lender and get a clear answer to what is expected of you.
