The Three C’s of a Mortgage Approval Process
The first and most important phase of getting a mortgage is actually having your application for the loan approved by the lender. The process of loan approval involves the following:
- A review of your loan application
- A verification of your credit and employment history, assets like mutual funds, bank accounts, and the property value.
Here is a discussion of the three most important aspects that will determine whether your request will be met positively or turned down.
Your credit worthiness is thoroughly perused by lenders. During the process of mortgage approval most creditors use a credit scoring system to evaluate your credit worthiness. If your credit score falls below the criteria set by the lender, then he may evaluate other aspects like your salary and employment history. If you have a history of delayed payments, your loan approval process can be an uphill one. You may need to provide clarifications as to why you missed or delayed making timely payments.
It is also the responsibility of the lender to provide reasons for rejecting your loan request. If this isn’t provided, you can inquire if credit worthiness or any other factor was responsible for the rejection.
Capacity to Repay
Lenders will no doubt want to know if you have the capacity to repay the loan, and manage the monthly loan installments. They usually look at your savings, income and other debts like student loans and car loans. So, ensure that your debts and mortgage installments do not exceed 36 per cent of your total monthly income in case of a conventional loan. But if you are going for an FHA loan, then your debt to income ratio can go up to 41 per cent.
Another aspect of the mortgage approval process is collateral. Collateral refers to the borrower’s pledge of his or her property to the lender for secure loan repayment. While evaluating collateral, lenders consider your downpayment, property type and property value. Most lenders ask you to pay a fixed amount as downpayment on the property or the home you want to buy.
Downpayment can vary from 10 per cent to 20 per cent of the purchased property price. FHA loans, RHS loans and veterans’ loans do not require you to make downpayments. If possible, it is always better to pay down as much down payment as possible.
The lender can ask for an appraisal of your property to know the worth of your home in comparison to other homes in your area. Usually, the lender will not offer you more than 95 per cent of appraised price.
Is There Anything You Can Do to Enhance Your Chances of a Loan Approval?
You can speed up your mortgage approval process and even improve your chances of getting the mortgage approved with the following steps.
- Respond promptly to requests for additional information and documents
- Do your best not to increase your debt when you are applying for a mortgage. In other words, reserve new car or furniture purchases until after the loan has been closed. Adding to your debt can have an adverse impact on your loan application.
- Make yourself available for the loan closing, or authorize someone to sign on your behalf with the power of attorney option.