Buying a home is an exciting moment in every person’s life, but applying for a mortgage can feel daunting when you don’t know what to expect. Whether you’re seeking a mortgage from a bank, credit union, or other financial institution, all lenders will want to ensure you meet some essential qualifying criteria before they approve your request to finance a house.
Each lender will have specific requirements to avoid financial loss, but there are some key signs you’ll get preapproved for a mortgage.
Getting approved for a mortgage loan can seem like a mysterious process full of uncertainty. You submit your application, and then you anxiously wait to hear back, wondering if you’ll get the green light.
Fortunately there are several key indicators that can help you gauge if your mortgage application is on track for approval. Keeping these signs in mind can give you confidence as you go through the loan process.
1. You Have A Strong Credit Score
Your credit score is one of the first things lenders look at when reviewing your application. In general, the higher your score the better your chances of getting approved. A score of 760 or above is considered excellent and qualifies you for the best terms and rates.
If your score is below 620, you may have trouble getting approved or have to accept a higher interest rate. Scores between 620 to 759 are still considered good to excellent. Improving your credit score can take time, but even marginal increases can make a difference.
2. You Have A Significant Down Payment
Lenders want to know you are financially committed to the home purchase. Putting down 20% or more of the purchase price tells them you are invested. With a lower down payment, lenders may ask you to purchase private mortgage insurance, which protects them if you default.
Come ready with documentation showing where your down payment funds come from, like bank statements, investment accounts, or a gift letter if using money from family. Funds must be verified as your own and not borrowed.
3. You Have A Low Debt-To-Income Ratio
Lenders calculate your debt-to-income ratio (DTI) by dividing your total monthly debt payments by your gross monthly income. This shows whether you have the capacity to take on a mortgage.
Many lenders like to see your DTI below 36%. But some may approve DTIs up to 50% depending on your overall financial profile. The lower your DTI, the better your chances of approval. Paying down existing debts can help lower your ratio.
4. You Have Stable Employment and Income
Underwriters want to see that you have steady work and income. Having consistent employment in the same field for the last 2-5 years is ideal. Gaps in employment may need explaining. Proof of regular income from sources like paystubs, W-2s and tax returns is required. Varied income sources need more documentation.
If changing jobs, show you havemaintained the same line of work. Get written confirmation of your new salary if possible.
5. You Provide Proper Documentation
Fully completing your application and providing all required documents goes a long way. Have your tax returns, bank statements, pay stubs, W-2s, and other files ready. Follow up quickly if any additional paperwork is needed.
Incomplete applications lead to delays and sometimes denials. Submit organized, easy-to-read documents, and be responsive to your lender’s requests. This shows you are an organized, low-risk borrower.
6. The Home Appraises For The Purchase Price
Lenders require an appraisal to ensure the home is worth the amount you offered to pay. If the appraisal value comes in lower than your offer, this creates a gap that may make your loan ineligible for approval unless you pay the difference in cash.
You can’t control the appraisal, but understanding the home’s realistic value from the outset helps avoid this scenario. Do your homework on fair market values in the neighborhood.
7. The Home Inspection Goes Well
While lenders don’t require a home inspection, any issues found could lead to loan denial. Inspectors look for problems like structural damage, leaks, faulty wiring and pest infestations. If big issues arise, you may ask the seller to make repairs or lower the price.
Carefully read the inspection report. Be ready to provide repair estimates and address any concerns the lender has about the property’s condition.
8. You Have A Co-Signer If Necessary
If your credit or income are less-than-stellar, a co-signer with stronger finances may help. Their good profile provides reassurance to the lender. Just note – they are equally responsible for repaying the mortgage if you default, so choose a co-signer carefully.
Having a co-signer shouldn’t replace improving your own financial situation, however. Work on increasing your credit score and income sources whenever possible.
Getting pre-approved early in the home buying process can also boost your chances of a smooth approval. Pre-approval provides a conditional commitment of funds by the lender before you make an offer. It shows sellers you are a serious buyer with finances in place.
While approval is never 100% guaranteed, keeping these key indicators in your favor goes a long way. Stay in close contact with your lender throughout the process. Ask questions if anything is unclear, and provide requested information promptly. This level of communication is hugely helpful.
With diligent preparation, you can feel confident knowing you’ve done everything possible to get the green light on your mortgage loan. Here’s to a successful loan process and the keys to your new home!
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Debt-to-Income (DTI) Ratio
The ratio here represents the level of debt you hold concerning your income. Typically, to be eligible for a conventional mortgage, your debt-to-income ratio is generally limited to a maximum of approximately 43%.
Suppose your monthly housing expenses, car loans, and other loan payments totaled $1,500, and your monthly income stood at $5,000. In this case, your debt-to-income ratio would be calculated as $1,500 divided by $5,000, equaling 30%, making it likelier to be approved for a mortgage.
However, if your debt level is high, you can purchase a more affordable home with a smaller mortgage or focus on reducing your debt before considering a home loan.
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FAQ
How do you know if a loan will be approved?
What are red flags in the loan process?
How do you know if an underwriter approves a loan?
How long does loan approval take?
How can I know if my mortgage has been approved?
Receiving conditional approval from your mortgage lender is a strong signal that your loan will be approved. It’s critical to follow up with anything your lender needs from you as quickly as possible so your loan can be approved and you can hear those three magic words: ‘clear to close!’
What happens when a home loan is approved?
Once the underwriter handling your home loan has verified your credit history, bank accounts, and income information, they will give you an approval. This approval may come with a formal approval letter that you can give to home sellers. If you’ve agreed to terms with the sellers, your home loan lender will then give you the approval to close on your home.
Can I get approved for a mortgage?
Can I get approved for a mortgage? Most mortgage applications are not perfect. Prospective borrowers often wonder if they meet the requirements. Home buyers have three levers to pull to increase their chances of a mortgage approval: income and debts, credit score, and assets.
What happens if you get conditionally approved for a mortgage?
Getting conditionally approved for a mortgage doesn’t guarantee you’ll receive one. Failing to complete the lender’s conditions or encountering another issue could result in your home loan being denied. The reasons for conditional approval vary based on your application and your mortgage lender.