Three Steps to Getting Approved for a Home Loan
If you’re wondering how to get a home loan approved, you’ve come to the right place. This guide takes you step-by-step through the approval process, including:
- Get pre-approved by a lender
- Complete a complete application
- Obtain final approval
Here’s what you need to know every step of the way.
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1. Get pre-approved by a lender
Mortgage pre-approval is the very first step in the home buying process. It’s basically a test that will tell you how likely you are to be approved for a mortgage and how much you are qualified to borrow.
When it comes to house hunting, your pre-approval letter is very important. This:
- Tells you how much you can afford to pay for your next home. So you only look at houses you can afford and you won’t be disappointed if you find your ideal home and it turns out to be too expensive for you.
- Makes salespeople and agents take you seriously. Most sellers will only consider an offer from a pre-approved buyer, especially in a competitive market.
You can also be prequalified if you want a quick estimate of your home buying budget. The process is generally faster and easier than a pre-approval. But being pre-qualified won’t give you the power to make an offer on a home like pre-approval would.
How to get pre-approved
Getting pre-approved is itself a three-step process:
- Choose a lender: We can put you in touch with some or you can choose your existing bank or a recommendation from a friend or family member. At this stage, you are not committing and you will have the opportunity to make comparisons later.
- Complete a pre-approval request: It may only take 10-20 minutes online. If your lender thinks you might be better suited for another type of mortgage, they might suggest you consider
- Document your identity, income and assets: Most lenders now allow you to upload your documents online for a quick pre-approval decision
If you meet the basic home loan requirements, then you will receive your pre-approval letter. These days, some lenders can provide them in hours or minutes. You can show this letter to real estate agents and sellers as proof that you are a viable buyer.
For more details on each step, read How to Get a Mortgage Pre-Approved.
Can you be pre-approved more than once?
Pre-approval letters have expiry dates. And you may need to renew yours several times during the house hunting process. Do not worry; lenders are used to it. But always keep your letter up to date. The last thing you want to do is find your ideal home, make an offer, and then find out that your letter has expired.
Note that these letters are linked to the mortgage rate applicable at the time of their issuance. If rates have generally increased since then, you may be able to borrow less. If they fell, you could be in line for a larger mortgage. Call your lender to stay up to date.
2. Complete a complete application
Getting pre-approved means your lender is willing, in principle, to lend you up to a certain amount of money. But after signing a home purchase agreement, you will need to complete a full mortgage application on the property you are buying.
This is the time when you should compare the best mortgage lenders and the best rates. In other words, you need to go to multiple lenders to find the one that gives you the lowest mortgage rate and the best overall deal. Seriously, by shopping around, you could save thousands of dollars in just a few years.
If you stick with the lender who pre-approved you, you’ll likely need to resubmit all or most of the documents you previously provided to ensure they have the most up-to-date information.
And, of course, if you change lenders, you will have to provide everything.
If you want your application to be approved quickly, gather all the documents you will need in advance. And scan them if you plan to download or email them. Or make copies if you mail them or drop them off at a branch. The sooner you send them, the sooner your mortgage can be approved.
Here’s a checklist of everything you’ll need to get approved for a home loan.
3. Obtain final underwriter approval
“Underwriting” is the final step in the mortgage approval process. When you sign up, the lender does a thorough review of your credit, income, assets, debts, and future home. A specialist underwriter combs through the paperwork, checking for red flags and hidden risks.
During this stage of the mortgage process, be as patient and responsive as possible to the underwriter’s questions. The sooner you fix the issues, the sooner you can be cleared for closure.
Many apps navigate with few or no requests. But the more complicated your request, the more likely your underwriter is to raise issues. This tends to be the case with candidates who are self-employed, rely heavily on tips and bonuses, or have difficult work histories.
Requirements to be approved for a home loan
Ultimately, a mortgage lender wants to know that you can afford the monthly payments on your new home and that you’re a responsible borrower who always pays your bills on time. To this end, the subscriber will carefully examine four criteria:
- Credit score and credit history: You generally need a score of 580-620 or higher and a clean credit history (no missed payments, foreclosures, bankruptcies, etc.)
- Deposit: Expect to need at least 3% down payment, although a larger down payment may make it easier to qualify
- Existing monthly debts: Your debt, including your new housing costs*, must be manageable. This includes things like car loans, student loans, child care/alimony, and minimum credit card payments
- Employment and income history: Your lender will want to see at least two years of stable income and employment history
*Your housing costs include monthly mortgage payments (principal and interest), property taxes and home insurance, as well as any mortgage insurance and/or homeowners association dues.
Of course, your underwriter will be interested in other things, like the assets you own. But these four will be their main focus.
Sometimes being strong in one of these four can compensate for weakness in another. For example, having an unusually large down payment can give you some leeway on your credit score or existing debts. But many mortgage programs have rules that the lender can’t get around.
For more information, see: Basic requirements for buying a house.
How to get a home loan approved: FAQ
Prepare all the documents you will need before applying and answer the questions. Choose a lender with an end-to-end digital mortgage process if you want the fastest approval or pre-approval.
The main obstacles to being approved for a mortgage loan are too low a credit score, too low a down payment, too high a debt ratio or an unreliable employment history.
You will need to bring a variety of financial documents to the bank for a home loan, including previous years’ W2s or 1099s, tax returns, pay stubs, and bank statements. The lender will also pull your credit and verify your employment status. Most lenders today have digital application portals where you can download these documents digitally instead of bringing physical copies to a physical office.
FHA loans have the lowest score thresholds: 580 with a 3.5% down payment or 500 with a 10% down payment. But you might be better off with a loan from Fannie Mae or Freddie Mac and their minimum score is 620.
There is a rigorous credit check during the pre-approval process, but it usually only affects your credit score by five points or less. And don’t worry about comparison shopping. “Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit file as one request,” explains the Consumer Financial Protection Bureau (CFPB).
Technically, no. However, sellers and real estate agents are unlikely to take you seriously if you cannot show a current pre-approval letter. If you are bidding on a home, the seller and their agent want to know that you are a serious buyer with financing lined up and can afford the property.
Getting Approved for a Home Loan
If you are serious about finding a home, now is the time to start the home loan approval process. You’ll want to be pre-approved before you make an offer on a home, and then seek full approval once you’ve entered into a purchase agreement.
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The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.