Mortgage Loan Approval Process

Let me guess….you are a first time home buyer and you are very confused about which steps to follow when purchasing your first home!

Guess what! You are not alone! Actually, this is the first step in getting a house: Mortgage Loan Approval Process. Of course, we will not get you going with the approval first but rather with mortgage pre qualification.

What does Pre-Qualification mean?

A pre-qualification means that based on the information you verbally disclosed to a lender, they had decided that you probably will be eligible for a loan up to a certain amount. Not to get confused with “pre-approval.”   A pre-qualification is a financial snapshot that gives you an idea of the mortgage you might qualify for.

What does Pre-Approval mean?

It basically means the maximum amount you can afford to spend on a home based on your credit score and all the document provided to the lender.

Which document will the lender need to get me pre-approved?

  • Credit Report – they will pull your credit to check your credit score
  • 2 years W-2 or 1099
  • 1 month of pay stubs, which mean 4 if you get pay weekly, 2 if you get pay every other week
  • Documentation on additional earnings if applicable, like alimony, child support or employment stock options
  • 2 years tax return if you are self-employed
  • 2 months bank statements, investment records, retirement accounts, real estate
  • all your monthly expenses including alimony and child support information, credit cards, student loans, car loans,along with balances and monthly payments
  • Bankruptcy discharge papers, if you have had a bankruptcy within the last several years
  • The Lender might also have you sign an IRS Form 4506-T, which allows the lender to get a transcript of your tax return from the IRS

There is a formula you can do if you would like to have an idea of whether you’ll get pre-approved. You need to find out your DTI (debt-to-income ratio). You can calculate your ratio by dividing monthly debt payments by gross monthly income (before taxes). You can download and print this debt-to-income-worksheet to find out your own DTI ratio.

The rule of thumb for most conventional lenders is that your back-end ratio should be at 36% or lower, there are a lot of different programs out there and, the ratio might be slightly different.

 

Credit scores on the rise thanks to changes at credit agencies from CNBC.

 

With your pre-approval in hand, sellers will know you’re a serious buyer.

Myth:

I Was Pre-Approved. I Got The Loan!

Well … not so fast. It does not necessarily mean that you got the loan!

There is always contingency to a pre-approval.

Subject to appraisal, which means an appraisal needs to be done and review by the lender. It is also a protection for you. Let’s say the value comes back lower than the sale contract. I don’t think you would want to buy a property overpriced, besides, at that point, your lender will lend you money based on the appraised value… Which means the difference between the appraised value and the purchase price will have to come out of your pocket on top of the original down payment and the lender will want a letter from you, saying that you are aware that you are buying a property that exceeds the appraised value.

Subject to a fully executed sale contract

Subject to additional documentation and most likely recheck your credit before closing so DO NOT buy furniture, a new car or anything else, this can cause your mortgage to get declined!

Ok, but what do pre-approved means then?

It shows sellers that you are a reliable, qualified buyer since you have a pre-approval in hands already. This gives them confidence in your offer.

Hope this has been very helpful to you!  Please use the comment box for any questions you might have 😉

10 Comments

  1. Thank you for this article. As a self-employed recently divorced guy I was uncertain of what is actually needed to get a mortgage. I have just turned the corner financially and have money put away to purchase a home. I do pay my self regularly as my business supports that income. Do I have to disclose that I am self employed even though my I am being paid regularly by a legitimate corporation?

    1. Author

      Hi Jim, Thanks for stopping by! I am assuming that if you get a paycheck from your company you also are getting W-2s therefore if you can provide the lender with 2 years W-2s with your company that should be good enough!

  2. It is nice to have this clearly laid out. It can be a really daunting task to buy a new home. You see couples on tv and the first thing they show is them looking at houses. they never talk about how they got the pre approval amounts or how hard it can be to get one. My cousin is looking at a new home now. She thought all she had to do was have good income and a decent credit score and over night she would be approved. No one talks about the fact that some banks can take days just to decide. It can be frustrating.

    1. Author

      Hi Maryann, it is very true, a lot of people are not aware of the process. Nowadays most Realtors won’t take you to look at houses if you do not have a lender pre-approval in hands. Thanks for your comment, I really appreciate that

  3. Hi, Carolle,

    Thank you so much for this article! It is an excellent reference for the very confusing, very overwhelming task of being a first time homebuyer. You explained this exactly like a mom would explain it to her children- clearly and confidently, but making sure to highlight how to be careful in the process. I appreciate this article, and I will be utilizing it in the future!

    1. Author

      Hello Megan, I am glad I was able to help you. It is a scary process as a first time homebuyer but with the right team, it should take a lot of stress away! I have a team of top-rated real estate agent so when you are ready to take that big step, keep us in mind!

  4. When I was pre-approved for my first mortgage, it was over the phone. I thought if they denied me, it would be less painful that way lol.

    This is a lot of useful information for the new home buyer. What do you think is the most unexpected aspect of buying a home for first timers?

    1. Author

      Hi Irma! Nowadays most of the lender will pre-approve you online. I think that a lot of them are not aware of all the help that is out there for them. It is very scary as a first-time homebuyer. I was there once and I was scared!

  5. Thanks for the info!

    You nailed it for me – I am a first time home buyer. I haven’t saved enough of a down payment yet that I want to so I am really happy I came across your site and now I will be looking into a pre-qualification to see where I stand. As I have not yet purchased a house the whole idea of it seems scary to me with all of the legalities and paperwork involved.

    You have definitely taken away some of that tension for me.

    Cheers,
    Kahlua

    1. Author

      Hi Kahlua! I am glad I was able to help you. Stay tuned as my next article is about down payment. I have also a team of top-rated real estate agent ready to help you so let me know if you need their help!

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