Mortgage Approval: What You Need To Know

There are several steps in the mortgage approval process, and it can be helpful to understand the difference between pre-qualification, pre-approval, conditional approval, and final approval. Pre-qualification is a quick process that can be done online, in person, or over the phone, and gives you an estimate of what you might be able to borrow. Pre-approval is a more in-depth process that requires more documentation and gives you a more specific idea of what you can borrow. Conditional approval comes after an underwriter has reviewed your application and may require additional documentation or clarification. Final approval is given once all conditions are met. You will typically be contacted by your loan officer or loan processor once your loan is approved.

Prequalification and preapproval

Prequalification is an early step in the homebuying journey. It is a simple and quick process that provides a general indication of whether you would qualify for a mortgage and how much you might be able to borrow. It is based on basic financial information that you provide, such as your income, credit score range, and expected down payment. Prequalification can be done online, in person, or over the phone and typically takes less than an hour. It is not a guarantee that you will get a loan, and it is not considered evidence of financing when making an offer on a home.

Preapproval, on the other hand, is a more specific and reliable estimate of how much you can borrow. It requires extensive financial documentation, such as W2 forms and tax returns, and a hard credit check. The application process is more time-consuming, and you should receive a preapproval letter within 10 business days of providing all the requested information. Preapproval confirms your creditworthiness and lets sellers know that you are a serious buyer. It is not a commitment to lend you money but greatly increases your chances of having your offer selected.

Factors that affect approval

There are several factors that determine whether your mortgage application will be approved. Here are some of the key considerations:

Credit Score

Your credit score is a significant factor in securing a mortgage. Lenders use this to assess your creditworthiness. The higher your score, the more likely you are to be approved, and the better your interest rate will be. Typically, a conventional mortgage lender will look for a credit score of at least 620. However, it is still possible to get a mortgage with a lower score, and there are government-backed loans available with lower credit score requirements. For example, you can get an FHA loan with a score as low as 500, and a VA loan has no minimum credit score requirement.

Debt-to-Income Ratio

Lenders will also consider your overall debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income, including future mortgage payments. To qualify for a mortgage, your DTI ratio should ideally be below 44%. Lenders do not want your housing costs to exceed 26% of your income, or your total debt costs to be more than 36%. A higher income relative to your debt means you can borrow more.

Work History and Proof of Employment

Lenders will typically ask for proof of employment and want to see that you have a steady income. They may require income records for the previous two years to ensure you can handle mortgage payments over the long term. For the self-employed, the process is often more complex, and lenders may ask for business and income records spanning several years.

Down Payment

The size of your down payment will also affect your mortgage approval. Lenders generally want you to put down between 5% and 25% of the price of the home. If you make a down payment of less than 20%, you will likely be required to purchase mortgage default insurance, which may restrict your mortgage approval choices.

Property Condition

The value and condition of the property you want to buy will also be considered. A home inspection and appraisal are usually carried out to ensure that the property is safe, in good condition, and worth the amount of money being loaned. If the home appraises for less than you have offered, you may need to negotiate the price down or walk away from the transaction.

Prequalification and Preapproval

Before applying for a mortgage, you can get prequalified or preapproved to understand your borrowing power and make your offer more attractive to sellers. Prequalification is a quick process that provides an estimate of what you can borrow based on basic financial information. Preapproval is a more specific estimate that requires more documentation and a credit check. It confirms your creditworthiness and shows sellers that you are a serious buyer.

Conditional approval

During this stage, specific conditions must be met, such as providing employment verification and proof of funds for down payments. While conditions can vary based on individual circumstances, some common ones include providing proof of income (e.g. recent pay stubs, W-2 forms, or tax returns), verification of employment (confirmation of your current employment status), and bank statements to verify assets and the source of funds. Conditional approval also allows the mortgage lender to verify all information before fully committing to the loan and ensures regulatory compliance, meeting legal and regulatory standards.

It is important to note that conditional approval is not the same as final approval. Conditional approval is a preliminary green light, indicating that the lender is willing to move forward with your loan, subject to specific requirements being satisfied. Once all the conditions are met, the loan moves to unconditional approval, signifying readiness for closing the sale.

Additionally, it is worth mentioning that conditional approval has a time limit, typically ranging from 30 to 120 days, depending on the lender. As the expiration date approaches, there is a higher likelihood of changes in your employment or income circumstances, which can impact your loan terms and cause delays in the loan process. Therefore, it is advisable to respond promptly to any requests for additional information or documentation to keep your loan application progressing smoothly.

Final approval

The final approval of your mortgage loan is the last step in the mortgage process. It comes after the conditional approval stage, where the underwriter has requested and received any additional documentation or clarification. At this stage, the underwriter has confirmed and analysed everything, including meeting the requirements, and the lender has formally approved the loan.

To increase your chances of final approval, there are several factors you can consider. Lenders look for a low debt-to-income ratio, typically below 30%, although loans have been approved with a ratio of up to 40%. A strong credit score is also important, and if this is lacking, a co-signer with a high credit score can increase your chances. Stable employment is another factor, with lenders typically looking for two years of stable or increasing income. A larger down payment can also increase your chances of approval.

The final approval stage can take anywhere from a few days to a few weeks, depending on any additional requests made by the underwriter. It is important to respond promptly to any requests during the mortgage processing stage to ensure a smooth and quick process.

Choosing a lender

Compare Multiple Lenders

It is essential to compare rates and terms from multiple lenders. Aim to consider at least three different options, including a mortgage company, a regional bank, and a credit union or small bank. This way, you can find the best fit for your needs and potentially save money. Some lenders may offer incentives, such as waiving private mortgage insurance or providing a network of real estate agents, which can sweeten the deal. However, be sure that these perks are things you will actually use and benefit from.

Research and Reviews

Look at online reviews and forums to understand other borrowers' experiences with a particular lender. While lenders may post positive reviews on their websites, you can also check sites like the Better Business Bureau for customer complaints and see how the lender responds to these concerns. Additionally, some lenders may display sample mortgage rates online, which can give you an initial idea of how they compare to other lenders.

Communication and Customer Service

Effective communication and responsiveness from your lender are crucial. Find a lender who explains things clearly and takes the time to ensure you understand the process. As a borrower, you may have questions or concerns, so it is important to feel comfortable approaching your lender and receiving timely and helpful responses.

Knowledge and Expertise

Working with a knowledgeable loan officer is key. You should feel confident that both the loan officer and the lender are capable of successfully closing your loan. They should be able to guide you through the process, answer your questions, and provide personalised communication.

Prequalification and Preapproval

Before committing to a lender, understand the difference between prequalification and preapproval. Prequalification is an early step where you receive an estimate of what you can borrow based on a basic assessment of your finances. In contrast, preapproval is a more specific estimate that requires additional documentation and a credit check. Preapproval confirms your creditworthiness and increases your chances of having your offer selected by the seller.

Your Financial Situation

Your financial circumstances may influence the type of lender you choose. For example, if you are self-employed, you may need a lender who does not require W-2 forms to verify income. Additionally, consider your credit score, debts, and the loan amount you are comfortable with.

Remember, choosing a lender is a significant decision, and it's worth taking the time to research and compare your options to find the best fit for your needs.

Frequently asked questions