Applying for a Mortgage? Know These Factors
When you begin the homebuying journey, you need to think about the mortgage process. It is unlikely that you are going to pay for your home with cash from your bank account. You, like most people, are probably using a mortgage loan to buy your home. So, you will need to understand the various factors that play a role in the pre-qualification and pre-approval process to ensure that you maximize your chances of being successfully pre-approved for a mortgage.
The biggest difference between getting pre-qualified and pre-approved is that pre-qualified is typically a faster and less detailed process while pre-approvals are more comprehensive and take longer. A pre-qualification estimates how much home you can potentially afford, while a pre-approval verifies your financial information for a loan. Please note that neither one guarantees that you will secure a loan from the lender.
Crucial parts of the homebuying journey include obtaining a pre-qualification or pre-approval letter, hiring a real estate agent, and submitting offers. Below, we will explore the factors that impact your ability to get pre-qualified or pre-approved from a mortgage lender.
Credit Score and History: One of the most significant factors that lenders assess is your credit score and credit history. A higher credit score is indicative of an individual who pays their bills on time and doesn’t carry a lot of debt. So, the higher your score the better. Lenders typically look for a credit score of 620 or higher when approving a loan application. Additionally, a long credit history that spans many years is preferred.
Income and Employment Stability: Lenders want to know that you have the income to afford a mortgage payment and that your income is stable. They prefer an individual who has had a steady job and has a low debt-to-income ratio. A person with a lower debt-to-income ratio can more easily afford their financial obligations.
Down Payment and Loan-to-Value Ratio: The amount of money you can put down towards your loan plays a significant role in your mortgage approval. The more money you can put down, the less money the lenders must lend you, which means less risk for them. Lenders also consider the loan-to-value ratio which signifies the amount you owe on the home versus its value. A lower LTV ratio also indicates a lower risk for the mortgage company.
Debt Obligations: The amount of debt that you owe matters too. They consider all your monthly expenses versus your monthly income. Lenders like people who have fewer debt obligations. Eliminating or minimizing common monthly expenses like car payments, and credit card payments can reduce your debt obligations. This lowers the debt-to-income ratio which lenders like to see.
Property Appraisal: The appraised value helps to calculate the property’s loan-to-value (LTV) ratio. This is a measure comparing the amount of your loan with the appraised value of the property. The higher your down payment, the lower your LTV ratio.
For purchases, an appraised value that equals or exceeds the sales price is good. An appraised value that is lower than the sales price is bad. But this provides the buyer and seller with options. The parties can choose to renegotiate and lower the sales price, or the buyer can choose to put more down to get the ratio back in line for the lender to approve.
For refinances, the qualifying loan amount is always determined by the LTV ratio of the appraised value.
Contact Our Mortgage Broker Today!
Local Lending Oklahoma is a mortgage broker serving the Oklahoma City, OK community. We want to help people achieve the American Dream of buying their own home. Mortgages are commonly used to help most people buy their homes. By understanding the factors that affect the approval process, you can take steps to maximize the probability that you will get pre-qualified or pre-approved for a mortgage and begin your home search. We can help you understand the approval process and your mortgage options. Contact us today to discuss your mortgage needs!
