Loan approval is a key step in the home buying process. A written loan approval is a requirement for most sellers, and it also helps buyers avoid surprises. Having an approved loan also makes it easier to close on a property.
Mortgage underwriters do a deep dive into your credit history and income. Trying to conceal information will make them suspicious of other aspects of your application.
Credit score
A credit score is one of the most important factors that lenders look at when evaluating a loan application. It gives lenders a more comprehensive and precise picture of an individual’s financial history and their likelihood of making on-time payments in the future. A high credit score also helps people get access to more loans and better terms. This is especially true for home buyers, who can benefit from getting pre-approved before they begin house hunting. However, it is important to remember that pre-approvals make a hard credit inquiry on an applicant’s report and may stay visible for two years.
Banks, credit card companies, auto dealers and retail stores use credit scores to decide if they should extend credit or loans to consumers. The credit scoring models used by these agencies take factors like credit utilization, payment history and age of accounts into consideration when determining a person’s score. Having a good credit score will help you be approved for more credit and may even result in lower interest rates, which will save you money over time.
Debt-to-income ratio
The debt-to-income ratio (DTI) is a key factor that lenders consider when approving a mortgage application. It compares your monthly debt payments to your gross income, which is the amount you earn before taxes and deductions. Lenders also use a similar metric called the credit utilization ratio to gauge your ability to manage debt repayment.
DTIs are important because they help lenders determine whether you have enough income to afford a new loan or credit card. A high DTI can prevent you from qualifying for a mortgage or other types of credit, or may result in more expensive or restrictive terms.
To calculate your DTI, add up all of your monthly debt payments, such as mortgage, auto loan, and credit card payments, then divide them by your monthly gross income. The lower the number, the better. If your DTI is over 50%, you should work to improve it as soon as possible.
One way to lower your DTI is by reducing your monthly debt payments. Another option is to increase your income by getting a side job or taking on additional employment. However, you must be able to prove that this income is reliable and stable. In some cases, you will need to meet certain criteria, such as working in your field for at least two years.
Employment history
Lenders look at employment history closely because it shows stability of income and the borrower’s ability to pay back a loan. Frequent job changes that do not reflect professional growth or a decline in income are red flags for lenders and may affect the mortgage approval process. However, a solid credit score and debt-to-income ratio can mitigate the impact of frequent job changes.
Applicants must provide copies of federal income tax returns from the past two years and verify their current employment with paycheck stubs, W2 forms or other documents from employers. In addition, lenders will require a statement that authorizes them to obtain verification of employment (VOE) from the borrower’s employer on company letterhead or through a third-party service.
Most lenders prefer to see at least two years of stable employment with no gaps. This is because it provides the best indication of an applicant’s financial stability. However, if there is a gap in employment, it must be explained adequately. For example, a gap in employment could be due to taking time off to care for a child or an illness. In these cases, a lender can request documentation from the borrower’s doctor or other related sources to validate the reason for the gap. Similarly, if the gap was due to active-duty military service, a lender can request discharge papers from the relevant military branch to validate this information.
Down payment
A down payment is an initial upfront partial payment for a home, car or other expensive item. The rest of the cost must be financed by another party, typically through a mortgage. The amount of money you put down can affect the type of loan you qualify for and your interest rate. Putting down more money reduces your loan-to-value (LTV) ratio and can save you money in the long run by reducing the amount you have to borrow.
Lenders often require down payments when financing expensive items because it reduces their risk. If you default on your loan, the lender can reclaim or resell the asset to recoup some of its losses. Down payments also show lenders that you have “skin in the game” and are committed to buying the property. This can improve your chances of being approved for a loan, especially if you’re interested in a conventional mortgage. Putting 20% down is ideal because it can help you avoid PMI, which increases your monthly expenses. Atlantic Bay Mortgage Group can assist you in finding the right loan for your situation.