Understanding The Mortgage Approval Process

The mortgage approval process is quite complicated and hard to understand. Getting approved for a mortgage is down to a lot of different things. It is important that you understand the process, however, as this will increase your chances of getting approved.

The Process of Getting Approved for a Mortgage

When you put in an application for a mortgage, the lender you are working with will send the application itself and all the supporting documentation to an underwriter.

“An underwriter is an entity, typically a company, that is accountable for analyzing and assuming the risk of another entity. Underwriting typically happens behind the scenes, but is an important aspect of mortgage approvals. The mortgage underwriting process has 5 key steps: verification, appraisal, title search and insurance, flood certification, and surveying.”

The underwriter is responsible for looking at the scenario you are proposing and will determine whether it meets their guidelines. They will ultimately decide whether or not you meet the necessary qualifications for a loan. There are a number of specific criteria that they will look at, the most important one being whether you will be able to pay the loan back.

The Debt-to-Income Ratio

To determine your ability to repay a loan, the lender will calculate your debt-to-income (DTI) ratio

“To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out).”

Most of the time, the DTI should be no more than 36%.

Credit Score and Other Factors

The second thing they look at is how likely it is that you will repay your loan. This is determined by looking at your current credit score and your payment history. This will determine how risky you are as a borrower.

Next, they look at the value of the home that you want to buy. They will use information provided by a professional lender to determine how much the house is actually worth. All lenders have a maximum loan-to-value (LTV), which is usually between 80% and 95%. The higher the value of your home and the lower the amount you borrow, the lower the LTV percentage is.

Finally, the underwriter will look at whether you can make a down payment. If this is lower than 20% of the value of your home, it is likely that you will also have to pay for private mortgage insurance (PMI), which will increase the cost of your monthly payments on the mortgage itself.

“PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.”

Once the underwriter has collected all this information, they will review all the documents that you have provided. They will also look at your ability to pay for the closing costs of the mortgage itself. You may also have to demonstrate that you have at least two monthly mortgage payments, sometimes more, in reserve. This will prove that you can pay for your mortgage for a certain period of time in case of unforeseen events or other emergencies.

Clearly, getting approved for a mortgage is down to a lot of different things. Besides your debt, income, down payment, credit history, home value, and personal savings, you also have to meet the different guidelines put in place by the lender.