Understanding the
Loan Approval Process
Call Us Today at 847 592-9215
Pre-approval, Loan Approval, Pre-qualification, Home Mortgage, Quick Rate Quote
There are many factors that are considered in the process of approving a home mortgage. Programs and Lender guidelines can change quickly. This article will discuss the five basic things you need to know.
1. Income. Most lenders require a 2-year work history. This doesn't mean you need to have two years on the same job. However, being in the same field is considered a plus. If you have changed fields recently, lenders like to see that it is a result of more schooling or that it has resulted in a higher paying job for you. You need to have a job or another stable source of income, such as a pension.

If you have recently become self-employed, this could be a red flag even if it is in the same line of work. Most lenders require a 2-year history for self-employment. A solution for this situation could be to apply for a no income or stated income type of loan. If you have recently graduated from college and you have found employment in the field that you majored in, you don't need a 2-year work history. Most lenders will approve the loan within your first few months of employment.

Lenders usually will go off of your gross monthly income (Income before taxes are taken out) to determine how much of a loan you qualify for. In order for bonus income or overtime income to be used, most programs require a 2-year history. If you meet that requirement, then the lender will take a two-year average of this income.

2. Ratios: There are two important ratios that lenders consider. The first one is called "the front end ratio". This is determined by taking your proposed monthly mortgage payment and dividing it by your gross monthly income. The general rule is that your monthly mortgage payment should be no higher than about one third of your gross monthly income. In other words about 33% of your gross monthly income. Many factors could change this however. For example excellent credit and great reserves may allow a lender to be much more lenient with how much of a loan you may quality for. A big down payment may also allow the lender to be much more flexible.

Then we have "the back end ratio". This is also very important. The back end ratio includes the complete mortgage payment plus all other monthly obligations. These other obligations would include car payments, credit card debt and student loans. The back end ratio usually should not be above 40% of the gross monthly income. Again, the same factors that I mentioned for the front-end ratio apply here. Lenders maybe very lenient if there are good compensating factors. However, you are the one that will be making the mortgage payment. Don't just look at how much a lender is willing to give you.
Make sure you can afford the payment!

3. Credit History: Your credit history is a snap shot of you. A lender will always pull your credit report to see how you have done in the past with paying your debt. Have you paid your debts on time? Are you currently late on some accounts? Do you have any collections? Judgments? Bankruptcy?

There are three major credit bureaus: Equifax, Experian and Transunion. Every time you have a payment to make, the creditor will report to the credit bureaus whether or not you made your payment and if it was on time. They will also report your current balances. The bureaus accumulate this information and then issue a score. You receive one score per bureau.

When you apply for a mortgage, Lenders will use these scores to determine if they want to approve your loan and under what program. Excellent credit are scores above 740. To receive a good interest rate, most lenders want to see a score of 620 or more. Scores usually range from the low 400's to the low 800's. The higher the score, the better the credit.

To learn more about credit scores, click here. There you can learn how to increase your credit scores and you can order your credit report for a fee. The basic rule is pay all debts on time and keep your balances as low as possible!

One thing that credit scores do not reveal is what caused someone to have late pays or collections. It may have been as a result of losing ones job, the death of a mate or a serious illness. In cases like these, you will need to work with an experienced mortgage planner who can guide you to the best options that are available.

4. Down payment: How much do you need to save for a down payment? Well, most lenders today require a minimum of 5%, but programs today come and go at the speed of light. Most programs also require that you must have proof of reserves. That is, a certain amount of money in your bank account even if they don't require you to use it. Call us to learn more about this and to find out about which programs are currently available.

There are other loans that require 3% down, such as FHA loans. Keep in mind that the less that you put down, the higher your payment will be. If you have the money to put down 20% or more, that may be a wise thing to do. An experienced mortgage consultant should be able to guide you with this decision.

5. Property Value: What is the house worth? What you agreed to pay and what a licensed appraiser thinks a home is worth may not be the same thing.

The condition of the home and the amount of upgrades will affect its value. Appraisers put more emphasis on what similar homes have sold for within a certain distance of the subject property, rather than what homes are listed for. If the home appraises for less than what you agreed upon, your attorney will guide you with what your options are. The lender will recognize the lower of the appraised value or the purchase price, if there is a difference.

By preparing wisely to buy your home and by knowing what is involved, you can avoid being upset and surprised by having your loan application denied by a lender. Talking to an experienced mortgage lender before you want to make an offer on a property is definitely a wise thing to do!

Best wishes & happy home buying!


     Top Five Reasons to Call

    1. Low Rates!
    2. Low Fees!
    3. No cost consultations!
    4. We complete the paperwork for you!
    5. Process is simple and fast!

    Get Started Today!

                 Call us at 847 592-9215

John's Blog | Mortgage Calculators | Helpful links | Economic Weekly Updates | School Reports | Are you a mortgage professional?
Refer a Friend | Glossary | Rates - Weekly Averages | Contact Us | Security | Licensing | Privacy Policy | Copyright | Site Map | Disclaimer

© John Santorineos Companies, Inc. dba AboutHomeMortgages.com, Inc.
NMLS ID: 224511

Chicago Web Design by Netrix, LLC