How to Get Approved For a Home Loan
Most people know that if they want to buy a house, they’ll need to take out a home loan. However, not everyone knows how to go about that. They don’t know how to get a mortgage or the necessary requirements for getting approved for the loan.
Getting a home loan is fairly straightforward, but you’ll need to provide documentation and meet a lender’s minimum requirements to ensure you can repay the loan. Many people are disappointed when denied a home loan. To help avoid this, you can learn about the approval process and mortgage loans to streamline your home-buying journey.
Knowing what to expect when working with a lender can help you determine your home affordability and prepare all the documentation necessary for approval.
So, you think you’re ready to buy a house, but do you actually qualify for a home loan? This article will discuss how to get approved for a home loan.
Qualifying for a home loan
When you apply for a home loan, lenders use a set of lending criteria to determine your eligibility. Major factors to consider when learning how to get qualified for a home loan include the following.
Your household income is one of the most significant factors in determining whether you’ll get approved for a home loan. Your lender is looking for if you earn enough income to cover your monthly mortgage payments and other bills like utilities, credit card bills and so forth.
Lenders also want to see consistent income with a job history of at least two or more years. This can make getting approved for conventional home loans challenging.
If you have a variable income, you may still qualify for non-QM mortgages. These loans have less stringent requirements. In either case, you’ll need to prove to the lender that you earn enough money to afford the loan.
Type of property
The easiest type of property to purchase with a mortgage is a primary residence because you plan to live in it.
Lenders expect you to spend at least a few years in the home, and since you’ll live in it, they’re seen as less risky for the lender. For example, if you lose your job, you’re more likely to prioritize mortgage payments on the home you live in than other types of property.
Some loan options are only available for primary residences. For example, VA loans backed by the Department of Veterans Affairs are only available to borrowers purchasing a primary residence.
Will you be able to pay your mortgage if you lose your job or have a major unexpected expense? Your mortgage lender must determine if you can pay your premiums even during a crisis.
To do so, they’ll review your assets. Assets include your checking and savings accounts, certificates of deposit (CDs), investments like stocks and bonds, and retirement accounts.
Along with verifying your income, job history and assets, lenders will check your credit score. A credit score check helps lenders determine if you’re someone with a history of paying their debts on time.
In general, lenders like to see a credit score of at least 620 to qualify for a home loan, but you may qualify for a loan with bad credit.
A higher credit score can help lower your interest rates, effectively reducing the loan’s total value and your monthly payments. A good or excellent credit score shows lenders that you don’t take on too much debt and have good financial habits. Meanwhile, a low credit score might tell them that a borrower already has a lot of unpaid debt.
Even with a low credit score, you might be able to qualify for a VA or FHA loan. It’s best to research if your credit score meets a lender’s minimum criteria beforehand.
Your debt-to-income ratio (DTI) compares your income to debts. This number tells lenders how much money you have to pay your monthly mortgage premium.
Lenders must determine you have enough money to cover every single one of your bills, including your home loan, car note and credit card debt. DTI is reflected as a percentage. It tells lenders how much of your gross income goes to paying off debts, and it’s easy for anyone to calculate.
To calculate, add up your monthly debts. Next, divide them by your pre-tax household income. Then, multiply that number by 100 to get a percentage.
Most lenders like to see a DTI of 43% or lower. The lower your DTI, the better the chances of you getting approved for a home loan.
Principal, interest, taxes and insurance (PITI) can tell lenders whether you can afford to purchase a home.
It’s also used to determine your home affordability when you use mortgage calculators online. To do so, you add your principal and interest amounts of the home loan, property taxes and homeowners insurance to determine how much a particular home will cost.
Private mortgage insurance (PMI)
Many people think they can’t purchase a home without having at least 20% of the home’s value for the down payment. However, that’s a common misconception.
You can purchase a home with less than 20% down, but you may have to purchase private mortgage insurance (PMI). PMI is insurance that protects the mortgage lender if you default on your loan, and it’s added to your monthly mortgage payment.
VA loans don’t require PMI, but it’s still worth it to save for a down payment to reduce your interest rate. The higher your down payment, the less you’ll pay in interest over the life of the loan.
Additionally, the more you have saved, the less you’ll need to borrow, so a higher down payment reduces your monthly mortgage payment.
Steps to get a mortgage
Now that you understand the factors that can affect getting approved for a home loan, you can decide whether now is the right time to purchase a home.
If you decide to move forward, you should understand the steps to get approved to help you understand what to expect and the documentation to have ready for the application.
Here are the steps to getting a mortgage loan.
Preapproval is the first step in getting approved for a mortgage, but it’s not the same thing as being approved. Preapproval tells you whether you’ll likely get approved for a loan and, if so, how much you may qualify to borrow.
Having a preapproval letter from a lender can help you determine your affordability and guide you to look at homes within your price range. In addition, it can make sellers take you more seriously.
Lenders determine preapproval by reviewing financial statements and information. For example, they might look at your pay stubs, tax returns and bank statements.
The preapproval process is more streamlined than approval. To get preapproved for a mortgage, you can pick a lender and complete an application online in just a few minutes. The preapproval application will ask you for income, assets and identity information.
If you meet a lender’s basic requirements, you’ll receive a preapproval letter you can start using while house hunting. However, the preapproval letter has an expiration date, so you may need to renew it multiple times while looking for a home.
It’s important to note that the mortgage preapproval letter does not guarantee that you’ll close on a mortgage loan. Instead, it’s a letter that estimates what you can afford at that time.
Additionally, you should know the difference between a mortgage preapproval and qualification. A prequalification is much simpler. A lender collects basic information about you to estimate how much you can afford.
Often, the information used to prequalify borrowers is self-reported. Lenders don’t verify any of the information or review financial documents, so it can provide you with more of an estimate and ultimately means less to sellers than a preapproval.
More serious buyers who want to purchase a home within the next few months should apply for a mortgage preapproval. This will give them a more accurate estimate of how much they can afford to spend on a home loan and what types of interest rates they can expect.
A preapproval letter means you may qualify for a certain amount of money. However, after finding your dream home and signing a purchase agreement with the seller, you must complete a full mortgage application for the property you’re buying.
During this time, you can change your lender and review mortgage rates to find the best option and lowest mortgage rates. Preapprovals are non-binding, so a lender could change their mind after reviewing all of your documentation when you apply for a mortgage. Additionally, another lender may determine that you don’t qualify for a particular loan.
A mortgage application consists of a more comprehensive review of your financial information, property appraisal and home inspection to determine if you qualify for a particular loan amount for a specific property. Remember, a preapproval doesn’t guarantee a loan.
When you complete a full mortgage application, the lender will thoroughly review your financial information. If you provided accurate information for preapproval and your financial status hasn’t changed, you’ll likely qualify for a similar amount.
Unfortunately, sometimes the loan commitment is less than the preapproval. For example, you can be denied because you no longer qualify for a home loan based on your financial circumstances. If this happens, you can re-qualify for a lesser amount. This means you might be unable to purchase the house you want, or you may be eligible for another type of loan that allows you to purchase the home.
Underwriting is the final step of getting approved for a mortgage. Your lender uses an underwriter to verify your income, assets, debt and property details to issue the final approval on the loan application. This process takes place behind the scenes. You’re not involved unless the underwriter needs more information or documentation from you.
After your appraisal—which your mortgage approval is contingent upon—an underwriter reviews your finances and determines how risky it is for a lender to give you a loan. The underwriting process helps lenders determine whether you can get approved for the loan. The underwriter will work directly with you to ensure you submit all the necessary paperwork.
While the underwriter determines a lender’s level of risk, they’re also beneficial for buyers. This process helps prevent you from closing on a mortgage you can’t afford. Underwriting can take a few days to a few weeks. You can streamline the process by providing all the necessary documentation as soon as possible.
But what exactly happens during underwriting? Ultimately, there are several areas underwriters look at to determine whether you qualify for a loan:
Underwriters determine whether you earn enough to cover your monthly mortgage payments using several types of documents, including W2s, bank statements, pay stubs and tax returns. If you’re self-employed, they may look at profit and loss statements and business income.
Appraisals are required when you get a home loan because they protect the borrower and the lender to ensure you pay only what the house is actually worth.
The lender will hire a third-party appraisal company to walk through the property and evaluate its condition. The appraiser will compare the home to similar homes recently sold in the area to determine the property’s true value. Then, the underwriter compares the appraisal to the loan amount.
They may deny your application if the home is worth less than the mortgage. However, most lenders will work with you. They might give you time to negotiate with the seller to lower the purchase price or determine whether you want to walk away from the sale.
Underwriters also evaluate your credit history to determine how likely you are to repay the loan. They will review your payment history, credit usage and age of the accounts—all factors that determine your overall credit score. Then, they’ll determine your DTI to determine if you can repay the loan.
Your assets can help you get approved for a home loan because they’re worth money.
For example, lenders might review your checking and savings accounts, investments, personal property and retirement accounts. These assets help lenders ensure you can make your monthly mortgage payments after paying closing costs. They also show that you have reserves for at least a few months in case of a financial crisis.
Types of home loans
The types of lending criteria used to determine your home loan eligibility are similar for most home loans.
However, different loans may have different qualifications. For example, some government-backed loans may allow for lower credit scores. In most cases, the qualifications are at the discretion of your lender, so it’s a good idea to do your research to find the best loans and lenders for you.
A few mortgage loan options include the following:
Traditional mortgages, also referred to as conventional mortgages, are conforming loans that don’t meet the requirements for government-sponsored programs.
There’s no single fixed set of requirements for conventional loan borrowers because the requirements are at the lender’s discretion. However, these loans come with stricter credit requirements.
Additionally, traditional mortgages often require a down payment of at least 20% to avoid PMI, but the down payment requirement may depend on the type of loan or property.
Traditional loans are available as fixed-rate loans, which give you a predictable monthly mortgage premium, or adjustable-rate loans (ARMs) with interest rates that fluctuate based on market conditions.
To decide which is best for you, consider whether you’d like to know how much you pay every month. However, there are several advantages to ARMs, such as a lower initial interest rate for a fixed period. But you may pay more in the long run if interest rates rise.
If you don’t qualify for a traditional mortgage, you may still be eligible for other types of home loans. Non-QM loans—or non-qualified mortgages—are home loans that allow you to qualify using alternative methods.
For example, you can qualify using bank statements and other assets instead of traditional income verification using W2s or pay stubs. Non-QM loans have less stringent lending criteria than traditional mortgages. Because of that, these loans can help the self-employed, business owners and retirees purchase a home.
Other examples of greater underwriting flexibility associated with non-QM loans include potentially lower down payments and no job history verification. However, if you’re a freelancer or business owner, lenders like to see that you’ve been doing it for at least two years and have a consistent income.
Like traditional home loans, these loans come with options. Options range from bank statement and asset-based loans to interest-only and near-miss jumbo loans.
You also have the option of adjustable- or fixed-rate loans.
VA loans are available for eligible veterans, active duty service members and surviving spouses. These loans are backed by the US Department of Veteran Affairs (VA).
VA loans have several advantages over conventional loans, such as not requiring a down payment and often having lower interest rates. Additionally, they don’t require private mortgage insurance even if you choose to put 0% down.
The loan requirements are much more flexible, allowing borrowers to qualify with a lower credit score. However, there are a few restrictions on this type of loan. For example, you can only use a VA loan for a home that will serve as your primary residence.
The loan approval is also subject to additional criteria determined by the VA. For example, the VA requires a specialized appraisal that determines the value of the home and whether the home meets the VA’s guidelines for livable conditions.
Additionally, closing costs vary slightly compared to traditional and non-QM loans. For example, VA loan borrowers pay a funding fee that supports the VA loan program. Lenders also have limitations on how much they can charge for various closing costs and fees.
Tips to raise your loan approval chances
Getting approved for a home loan is simple as long as you meet your lender’s requirements. Unfortunately, not everyone can. However, you can make yourself more appealing to lenders by following these tips:
Pay off debts
Remember, underwriters compare your income to your debts to determine your ability to repay. Your debts also impact your credit score. Therefore, paying off your debts before applying for mortgage approval can reduce your DTI and help you get approved for more.
Even if you get approved for a home loan with a high DTI, you should avoid adding on more debt while you’re buying a home. Lenders may recheck your credit score before closing.
Save for a down payment
The higher your down payment, the more appealing you are to lenders. A higher down payment means getting approved for a higher loan amount while reducing your interest rates for lower monthly payments.
The down payment required varies by loan and lender, but you should plan to save at least 3.5% for a down payment and aim higher if you can. Paying as much as 20% can reduce your overall loan balance while preventing the need for PMI.
Keep a steady job
Most lenders like to see that you’ve been at the same or similar job for at least two years. By doing so, you demonstrate a predictable and stable income.
As a result, job hoppers are less likely to get approved for mortgage loans even if they can prove their ability to repay because they have less consistent income. However, your lender may have less strict job history requirements. For example, many lenders approve individuals who have changed jobs if they work in the same industry or perform similar duties.
Buying the home of your dreams
Getting approved for a home loan may seem daunting, but it’s quite easy as long as you meet a lender’s requirements. Therefore, we recommend researching various loan programs to find the best one for your and your unique situation.
Contact Griffin Funding to learn how to get qualified for a home loan or discover our various loan programs. Then, when you’re ready, you can apply with Griffin Funding online to get approved for a home loan.
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