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Can I get approved for a mortgage?
Most mortgage applicants are not perfect, and many wonder if they can even get approved for a mortgage.
Home buyers have three levers to pull to increase their chances of a mortgage approval: income and debts, credit score, and assets.
When you’re strong in all three categories, you’re more than likely to be approved for a mortgage.
If you’re weak in one area but strong in others, you still stand a good chance of approval. The rules are often flexible and you won’t know if you’re qualified until you apply.
Here’s how to stack the odds in your favor.
Check your mortgage approval odds. Start here (Jan 8th, 2022)
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How do I know if I’ll get approved for a mortgage?
You can usually get a feel for whether you’re mortgage–eligible by looking at your own personal finances.
You’ll have the best chances at mortgage approval if:
- Your credit score is above 620
- You have a down payment of 3–5% or more
- Your existing debts are low
- You’ve had a stable job and income for at least two years
But keep in mind that rules for mortgage approval are not set in stone. Far from it.
In fact, every mortgage loan program has different eligibility requirements. And lenders can set their own rules, too; some are far more lenient than others when it comes to loan approval.
So if you’re not sure whether you’d qualify, your best bet is to check in with a lender.
You can usually get an answer on your eligibility – what’s known as a mortgage preapproval – for free within 1–3 days. That way you’ll know for sure which loan program(s) you’re qualified for and how much you can borrow for your home purchase.
Get started on your mortgage preapproval here (Jan 8th, 2022)
Mortgage approval process
Most borrowers get preapproved before shopping for a home.
Then, once you have a signed purchase agreement and you’ve chosen a mortgage lender, you’ll follow up with a full mortgage approval. This is a little more involved than the preapproval process.
Approval and underwriting
Mortgage approval is mostly a waiting period for home buyers. Once the seller has accepted your offer, your lender will order an appraisal of your new home and begin underwriting your mortgage loan.
During this underwriting process, your lender will take a comprehensive view of your finances.
Be prepared to provide the following information, if you have not already done so during the preapproval process.
- Proof of monthly income
- Proof of assets
- Employment history
- Credit history
- Debt–to–income ratio (DTI)
You also need to provide financial documentation to assist your loan underwriter – again, if you haven’t already provided items during mortgage preapproval.
- W–2 forms (or 1099 forms if self employed)
- Tax returns
- Pay stubs
- Bank statements
- Government–issued identification, like a valid driver’s license
- Social Security number
It’s important to respond to any requests from your mortgage lender immediately during the approval process. Failure to do so could extend the time it takes to get approved.
Additionally, using a mortgage approval checklist will help you organize your home buying process.
Credit check
Your lender will order hard inquiries of your credit reports with the major credit–reporting bureaus to ensure your credit score hasn’t changed since preapproval. However, if your credit was processed during the preapproval and is less than 90 days old, an additional credit check will not be necessary.
“After initial approval, regardless of the age of the credit report, there is always a soft pull reverification to confirm that nothing significant has changed,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Your loan officer will double check your creditworthiness and take note of any changes to your credit history, such as opening new credit cards, taking out car loans or student loans, new monthly debt, or any debt payments that are outstanding.
It’s recommended that you do not open new lines of credit or take out any loans during the underwriting process. If you’ve done the hard work of establishing good credit, then any borrowing before mortgage approval may affect the final outcome.
Approval vs preapproval
While similar to loan approval, mortgage preapproval is when your lender approves you for a specific loan amount after verifying your credit score and financial documentation.
Your loan officer will issue you a preapproval letter, which is typically good for 60–90 days.
Preapproval generally happens at the beginning of the home–buying process.
Having a pre–approval letter in hand is helpful when you’re house hunting because it signals to real estate agents and sellers that you are a serious buyer. Plus, preapproval establishes the price range of homes you can afford.
Preapproval vs prequalification
Mortgage prequalification and prepproval are both useful tools to buyers preparing for a home purchase and homeowners looking to refinance.
When you’re prequalified by a lender, you’re given a general estimation on the size of the loan you could qualify for. Mortgage prequalification is based on self reporting of your monthly income, credit history, and other financial details.
On the other hand, mortgage preapproval is a rigorous verification of your financial life that yields a specific loan amount that your lender is willing to finance.
Conventional mortgage approval: Fannie Mae and Freddie Mac
Freddie Mac and Fannie Mae loans (also called conforming mortgages) allow FICO scores as low as 620. They also approve mortgages with loan–to–value ratios as high as 95% or 97%. That means you need to make a down payment of at least 3–5%.
In addition, the two corporations will buy mortgages with maximum debt–to–income ratios of 45% under their standard guidelines.
However, this does not mean that you can get approved with a low down payment and a high DTI and a poor credit score.
If your credit score is on the lower end, for instance, you might need a bigger down payment or extra cash reserves. A larger down payment can also help you get approved if your debt–to–income ratio is on the high end (above 36%).
According to the ICE Mortgage Technology Origination Insights Report, the average borrower using a conventional loan has a credit score in the mid–700s and more than 20% down.
Average profile for conventional loan approval
- FICO score: 755
- LTV ratio: 81%
- Down payment: 19%
- DTI: 35%
*Purchase loan approval data from the September 2021 ICE Mortgage Technology Origination Insights Report. Averages may have changed by the time your read this
Mortgage approval with FHA loans
The Federal Housing Administration’s guidelines for FHA loans are much less restrictive. They allow loan approval with a FICO score as low as 580 and just 3.5% down, and a score down to 500 with 10% down.
However, there is a difference between allowing a low credit score and actual bad credit. If your score is low because you have little credit history, too many accounts, or bad history that’s at least a year old, FHA may give you a shot.
But if you’re missing payments all the time or have multiple collections, you’re too risky. You may have to prove that you can manage a monthly mortgage payment, and that means paying your bills on time for at least 12 months.
“You will have the opportunity to provide explanations for missed payments, but too many can hurt your chances,” says Meyer.
Data from the Origination Insights Report shows that FHA loan approval is more lenient than conventional loan approval.
On average, FHA borrowers get approved with lower credit scores, lower down payments, and higher debt–to–income ratios than conventional loan borrowers.
Average profile for FHA loan approval*
- FICO score: 676
- LTV ratio: 95%
- Down payment: 5%
- DTI: 43%
*Purchase loan approval data from the September 2021 ICE Mortgage Technology Origination Insights Report. Averages may have changed by the time your read this
Mortgage approval with VA loans
Like FHA loans, VA loans are backed by the federal government. Thanks to this insurance from the U.S. Department of Veterans Affairs, VA loans can offer more flexible approval standards than conventional conforming loans.
Once again, the differences can be seen in the average loan approval for a VA mortgage. VA borrowers have lower credit, lower down payments, and higher DTIs than conventional loan borrowers.
Average profile for VA loan approval
- FICO score: 720
- LTV ratio: 97%
- Down payment: 3%
- DTI: 41%
*Purchase loan approval data from the September 2021 ICE Mortgage Technology Origination Insights Report. Averages may have changed by the time your read this
It’s a balancing act
Understand that there is a close relationship between mortgage approval and your FICO, DTI and LTV – your credit score, debt–to–income ratio and your down payment.
If you are weak in one area, you’ll need to make it up somewhere else.
In mortgage–speak, this balancing act is known as “compensating factors.”
For instance, a big down payment or extra cash reserves can be compensating factors for a lower credit score.
If you’re not sure whether you’d qualify for a mortgage, it’s worth talking to a loan officer. They can help you look at your personal finances through the lens of mortgage approval.
Even if you don’t qualify for a home loan right now, your loan officer will help you understand exactly what needs to change before you can get mortgage–approved and how to get there.
How to improve your chances of mortgage approval
If your debts are too high or your credit score too low, maybe home buying is not the best move right now. But it could be in a year. Or even six months. You need to start “practicing” for homeownership now, and this will put you in a better position to buy.
Using our Home Affordability Calculator, determine how much house you want to buy and what payment you’ll have to make each month.
“Note that if you are currently paying rent, you may not be held to the monthly maxes that are set with mortgages and may be at a lowering max payment for purchases,” adds Meyer.
- Subtract the difference between that new payment and what you currently pay for housing now
- Take that difference, use it to pay your debts down to a manageable amount
- Once your debt is under control, put that amount into your savings to boost your down payment
This accomplishes several things. It teaches you what you’ll have to live on once you buy your house, so your spending stays under control. It also helps increase your credit score. And it makes you less likely to fall into that dreaded Low Credit Profile category – the one lenders shy away from.
Mortgage approval FAQ
Most borrowers need at least 3–5% down to get approved for a home loan. If you qualify for a VA loan or USDA loan, though, you might get approved with no money down at all.
FHA loans have the lowest credit score minimum of any loan program. You can typically get approved via FHA with a credit score as low as 580. To get a conventional conforming loan, you generally need a credit score of 620 or higher.
There’s no minimum income to get approved for a home loan. Lenders care more about your debt–to–income ratio than your income level. So someone with low income but no monthly debt could have an easier time getting approved than someone with high income and large monthly debt payments. Lenders also want to see a consistent income history. To get approved, you usually need a two–year history of steady income and employment in the same role or industry.
A number of things could stop you from getting mortgage–approved. Borrowers might be denied because of a low credit score, inconsistent income or employment history, or an insufficient down payment. Rules vary by lender and loan type, though, so you should shop around for the program that best suits your financial profile.
Most lenders can offer an initial pre–approval within 1–3 days. To get a full mortgage approval, though, you’ll have to go through underwriting. Depending on your lender, this can take anywhere from several days to a month. Mortgage approval involves an in–depth review of your credit, savings, income, employment, and the property you wish to buy or refinance.
Today’s mortgage rates
Qualifying for a home loan is possible, and when you bring a good credit score and a sizable down payment to closing, you’ll get approved with a lower interest rate than other first–time home buyers.
Begin your home buying journey today by checking your lowest mortgage rates with multiple lenders. Who knows? Mortgage approval may be closer than you think.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement 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, or affiliates.
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