My Top 3 Most Important Factors in Getting Pre-Approved for a Mortgage

In the United States, most people imagine themselves owning a home one day. Whether you are planning on waiting till you get your first job, getting married, starting a family, or any other time, the process will still be the same. Whichever stage you are in, you are hoping for the same end goal; to get an approved loan for your mortgage. In general, there are three basic contributing factors that will determine if your loan will qualify for a loan. I believe the items that carry the most amount of weight in qualifying for a mortgage are the credit report, housing and DTI ratio, and verified assets for closing costs. In order to get approved, there are other factors but I will be focusing on the three listed here.

Credit Report

When clients are interested in buying a home, they come to my office so I can pre-qualify them and see what they can afford. Once I receive some basic information, I will then go ahead and run your credit. Simply put, the better credit you have, the easier and better mortgage you can receive. The first thing I will notice is your credit score. Based on your score, I will have a good idea right away if you will be able to get approved for a loan or will have to wait until your score is improved later down the line.

After looking at your scores, I will scroll to examine all the information on your credit report. Based on previous purchases and loans taken out such as student loans, car payments, credit cards, and others, I will see if you pay your bills on time. If you do, your credit score should reflect this and be higher. Not paying your bills and having foreclosures, bankruptcies, delinquencies, etc… can all lower your credit score. Keep in mind, if you are looking to buy a home soon and you qualify for a loan but your credit score is low, you can refinance your mortgage down the line after fixing your credit and lock in a better rate.

Housing and DTI Ratio

Most people are aware that their credit report plays an important role on if they will get approved or denied on a loan. However, fewer people know what is and the importance of their Housing and DTI Ratio. Let’s assume that you have good credit. If that is the case, you will move to the next step of getting pre-qualified. The Housing Ratio of a person is the total cost of monthly mortgage payment divided by the borrower’s monthly income. This includes the monthly payment for the mortgage, hazard insurance, taxes, and mortgage insurance. For example, if a person will be paying a total of $1000 per month on a house and their income is $4000 per month, then their Housing ratio is 25% ($1000/$4000).

Debt-to-Income Ratio (DTI) is all of your monthly debts including your new mortgage payment divided by your income. Let’s say that that same person from above has a car payment of $500 per month. He also has student loan payments of $250 per month and a credit card payment of $250. Therefore, his total DTI ratio including the housing payment would be 50% (($1000 + $500 + $250 + $250)/($4000)). In general, to get approved for a conventional loan, your Housing and DTI ratios must be below 45%. Based on the scenario above, this person would not get approved for a conventional loan because although his housing ratio is below 45% (it is at 25%), his DTI ratio is above 45% (it is at 50%). For an FHA loan, your Housing ratio should be below 47% and your DTI should be below about 50-55%. The person above could get approved for an FHA loan since his Housing ratio is below 47% and his DTI ratio is below 55% As a rule of thumb, if your ratios go above these numbers, you won’t qualify for that house and will have to find a home that has a smaller monthly mortgage payment amount.

Assets for Closing Costs

Once your Housing and DTI Ratios are where they need to be, one of the last important items required to get approved for a mortgage are your verified assets. In order to afford buying a home, you must have the funds to cover the down payment and closing costs of the transaction. To verify these funds, I examine your bank statements to ensure the money is acceptable to use for this deal. Any funds you plan to use for closing costs should be kept in your bank account for when the time comes. Cash on hand will almost never be acceptable to use.

Keep in mind that FHA loans require a minimum of 3.5% down payment of the loan you are taking out. Conventional loans are often a minimum of 5% down payment. Now, in either case, gifts of equity from family members are often acceptable to help cover the closing costs. However, if you plan on purchasing a home, it is a good idea to start saving early.

If you are interested in buying a home in the future, schedule an appointment with me so I can pre-approve you for a home and see how much of a loan you can qualify for.