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Have you got pre-approval for your mortgage? In any market, getting pre-approved is a great way of getting an advantage over your competition. If the market is slow, then most sellers will be more than willing to deal with you, and in a hot market, then pre-approval is practically mandatory.
So no matter how the market is doing, it is definitely a good idea to get pre-approved for your mortgage. Regardless of whether you do get approved in advance, getting lender approval is something that nobody can skip when they are getting a mortgage. If you do not get pre-approval, you will still need to get approved before you get the loan.
Every mortgage applicant needs to get their loan approved, so it is definitely good to know how the process works, what information you need to supply to your lender, and what you can do to improve your chances of being approved.
Lender Requirements for Loan Approval
When a lender looks at your application, they assess your level of risk based on two criteria:
• Lenders investigate your ability to repay a loan with a thorough examination of your current financial situation, including your debts and income. This requires you to submit a large amount of financial information, which your lender uses to determine your income to debt ratio. Debt ratio is a percentage that helps determine your eligibility. Generally lenders like to see a ratio of between thirty six and forty percent.
• Your willingness to repay the loan is evaluated via your credit score, a numeric representation of your financial history. This includes not only credit cards and loans, but also utility payments, rent, and other debts, as well as repayments on previous mortgages.
Your credit score is particularly important, as it helps determine the interest rate you can achieve as well as your mortgage eligibility. Lenders view a credit score of at least seven hundred and twenty as a low-risk prospect, and assuming you have both a favorable income to debt ratio and a good credit score, your mortgage approval is almost guaranteed.
Information to Supply your Lender
For almost all mortgages, lenders will want to see a substantial amount of information about your current financial situation. The only exception is for low-documentation mortgages, which typically carry a much higher interest rate than conventional loans.
Most mortgage lenders require some or all of the following information. The exact nature of the information will depend on your financial and personal circumstances.
• Two years worth of federal tax returns
• At least two or three months worth of pay stubs
• Two years worth of employment history, including income and employment dates
• Supporting documentation for any other income you want the lender to include when they assess your income
• If you are self-employed, financial statements for your business
• Payment statements for current creditors, including contact details for the creditors as well as the current loan balance
• Letters explaining the reasons for any current or past delinquent loan payments
• Up to twelve months worth of payment verification for any current mortgage or rent payments
• Verified copy of an alimony or child support agreement if you are paying or receiving alimony or child support
• Copies of relevant documentation if you have ever been bankrupt
• Sale contracts for your current home if you are selling it; and
• House plans and costs if your mortgage is for a home you are building, plus proof of ownership of the lot
Increasing your Chances of Approval
The best way of improving your chances of getting mortgage approval is to reduce your debt or improve your credit score. These are generally the most practical options, and the ones that most people can readily achieve within a few months.
If your credit rating is so low that you ca not get approved for a favorable interest rate, for example, it is possible to improve your credit score over the course of several months by reducing your debt, getting bills and loan payments in on time, and checking your credit report for errors. This is usually a better option than settling for a sub-prime mortgage with a higher interest rate that will cost you much more over the life of the loan.
One additional thing to note is that if you have an exceptional credit score and a poor income to debt ratio, or vice versa, the stronger attribute can sometimes make up for the weaker one. So if, for example, you have a credit rating of eight hundred or more, you might be able to get a good loan even with a poor income to debt ratio. The important point is to play up your strengths. If you have an excellent, stable work history, for example, this might compensate for a slightly lower credit rating.
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