What you need to know about the mortgage approval process
As you begin the home buying process, you’ll first need to look into what kind of mortgage you can receive (and afford). You may wonder where you stand on the credit continuum and what your chances are of securing the loan you want.
Are you the borrower of a lender’s dreams or an accident waiting to happen? Before meeting with a mortgage company, you might want to ask yourself if you meet the requirements they will be evaluating.
Do you have a stable job?
Being able to provide evidence that you have a reliable and strong income stream will make you more attractive to lenders and get you a better interest rate. The longer you’ve been with your company or in your respective industry, the better you will look. If you’ve changed jobs within the past two years, you’ll likely have to provide reasoning to your lender. They will evaluate your occupation based on the size of your income and the length of your experience at that place of business and in that field.
What is your credit score?
Your credit score will let lenders know the likelihood that you will make your mortgage payments in full and on time. With most loans, the lower your score, the higher your interest rate will be in order to compensate for the risk of lending you money.
The minimum credit score required depends on the type of loan you’re seeking and the lender. In order to clean up your score, try to lower your debt-to-income ratio by paying down your current credit cards and other bills to become as liquid as possible. You’ll also want to make sure you don’t take on new debts or apply for new lines of credit, as both will impact the length of your credit history and could indicate financial trouble.
What debt do you have?
Another factor lenders take into account is the amount of debt you currently have and how well your current finances will manage the additional costs of a mortgage payment. Lenders will evaluate two debt-to-income ratios: the front-end ratio and the back-end.
Your front-end ratio includes all of your home expenses, such as insurance, taxes, and other recurring bills, divided by your gross monthly income. Your back-end ratio is all of your home expenses plus your other debt (like student loans, car payments, and furniture payments) divided by your gross monthly income. If there is any debt you can pay off before seeking a home mortgage, it’s best to do so to ensure the approval process goes smoothly.
How much of a down payment can you afford to make?
Generally, you’ll need to be prepared to give 20% upfront to pay for your home. While bringing less to the table doesn’t mean you can’t get a mortgage, if you have a poor credit score and finances, you might be required to put up a larger down payment to make your lender more comfortable. If you are unable to put 20% down, you may be required to pay for Private Mortgage Insurance (PMI) for a conventional loan. Be sure to understand the process and requirements of PMI before accepting that as an option.
Qualifying for a mortgage isn’t an easy or quick process. However, if you know what you’re being evaluated on beforehand, you can learn how to turn yourself into a dream borrower prior to meeting with a lender.
Real estate can be complicated, and that’s where No Limit Real Estate earns our stripes. Born and raised in South Florida, our team is available to walk you through the entire process – from finding the perfect home to negotiating the right mortgage. We strive to be creative and aggressive with our negotiations, even if it means less commission for our firm.
Learn more about “Why No Limit?” and take the first step towards getting the home and mortgage that are perfect for you.