A Mortgage Approval Shows What You Can Afford
You have made the decision to buy a house, and you are so excited that you start calling realtors to look at every house you can find on Zillow. As tempting as that may seem, you should get approved before you begin searching and fall in love with a house. A mortgage approval will show you how much you can afford and what the monthly payment will be.
What is an pre-approval?
A pre-approval is a decision made from the lender that indicates that you are a good candidate for a mortgage loan based on the information that you have given them. Although there is no manual underwriter review, the information is run through an automatic underwriting system to compare the Fannie Mae and/or Freddie Mac guidelines against your information to determine eligibility. The lender will then supply a pre-approval letter that will show the loan amount, interest rate, and what the monthly payment will look like. Most realtors require this prior to showing a house. There is a difference between pre-approval and prequalification. Read the FAQ to see the difference.
Why Getting Approved Is Important
There are a few advantages of approval:
- You will not waste yours and your real estate agent’s time looking for houses that you cannot afford because the approval will make you both understand what is in your budget along with the interest rate and monthly payment will be.
- Having an approval puts more emphasis on your offer by showing the seller that you are serious and have the means to to obtain financing.
- Less surprises that could slow the process of closing the loan.
It is important to understand that the approval is only the first step. Once you find a house, and make an offer, it will be necessary to undergo inspections and appraisals. Also, if your situation changes (i.e. change in job, change in assets, change in liabilities), the approval amount could change.
Mortgage lenders typically consider three factors when determining how much you can borrow: assets, income, and liabilities (credit).
Assets are things of value that you own and can turn into cash if you need to. Your checking account, savings account, 401k, certain life insurance policies, real estate, and other retirement accounts are typically considered assets. Lenders will review whatever assets you want considered to both determine your ability to make your monthly payments and have enough cash to close the loan.
Lenders review your income to ensure that you can make your monthly payment. Income is considered all money that you receive such as money you receive from employment, self-employed income, disability benefits, retirement income, and in some cases you can include child support and alimony. Your income is also considered to determine whether your mortgage, accompanied with your other monthly bills, will allow you to maintain an acceptable debt-to-income (DTI).
It is important to not only consider your FICO score when reviewing your credit or conducting any repair. Having late payments in the last 12 months is going to add challenges to your mortgage loan. Having too many accounts open with balances can affect your DTI. So while higher FICO will qualify you for better rates, it is also important to limit how many accounts are open on your credit and how much you are paying out.
Will getting approved affect my credit score?
Getting approved involves pulling a credit report, which puts an inquiry on your credit report and can potentially lower your score a few points. The fluctuation depends on how many inquiries are already on your credit in the previous 12 months. This article on improving your credit score will help you understand what goes into a credit report.
How to Get Approved
All mortgage lenders or brokers have their own processes for getting you approved. There are different levels of approval.
A pre-qualification is determined by the loan officer using supplied information about your assets, income, liabilities, and credit score. There is little to no verification that is performed during this process. The loan officer may only run a soft pull on your credit, if at all.
A pre-approval is similar to the pre-qualification, except everything is verified. The loan officer will ask you to provide paystubs, W2, bank statements, and they will pull credit from all three bureaus.
Is Pre-Qualification or Pre-Approval better?
Homewise Financial Corporation only uses in its formal process of approval. While our loan officers may ask general questions about your income, assets, liabilities, and credit score before you apply, this is to get a general idea on whether approval is expected. Here are some of the benefits to obtaining the pre-approval before submitting the loan to underwriting:
- By collecting the documentation in the front-end, there is a smaller chance of surprises once the loan is submitted, since the loan officer is verifying assets, liabilities, and assets before and able to use that information to obtain approval in the Automated Underwriting System (AUS).
- Saves time: With the loan officer collecting a majority of the information on the front-end, there are fewer conditions once the loan is submitted.
- More accurate: The loan officer is able to use reliable information to determine your credit worthiness, how much you have available for a down payment, and how much you will be allowed to borrow. Most loans that fail are due to inaccurate information being used during the approval process.
Approvals After Loan Submission
Once the loan is submitted to underwriting, the work begins in getting your mortgage loan to closing. The underwriter will evaluate the loan package and make a determination of additional items that are needed before allowing the loan to close.
This is the most common scenario for the majority of mortgage loan submissions. The conditional approval means that the underwriter has determined the loan to meet guidelines but requires additional documentation prior to clearing the loan for closing. If a pre-approval was obtained, typically the main condition on the loan will be an appraisal to be conducted on the subject property. In addition to the appraisal, the underwriter may want some additional title work, verification of employment, or some letters of explanation. Your loan officer will work through these conditions, order the appraisal, and will reach out to you for any additional items they need from you. There is no reason for alarm if additional documentation is required.
Final Approval (Clear to Close)
Once the underwriter has determined that all conditions have been met on the mortgage loan, they will issue a final approval or clear to close. Depending on the loan submission, whether an appraisal waiver can be obtained, or what verification were needed, the mortgage loan may go directly to final approval from submission.
Why Choose Homewise Financial?
- Application process is completely online.
- Loan specialists available to answer your questions and help you understand the process.
- As a mortgage broker, we have exclusive access to a vast network of lenders to offer competitive rates and diverse loan programs to suit your goals.
- Personalized experience. We will “hold your hand” through the process to ensure your comfortability with the loan program and process.