Am I Able To Get Mortgage Approval?
It can be hard to have perfect credit and great finances, and many folks wonder if they can get approved for a mortgage.
Three things will increase your approval chances: credit score, income and debts, and your assets. If you are good in all three of these categories, you are more likely to get approved for a mortgage.
Even if you are weak in one of these areas, you still have good odds of getting approved. The rules are flexible, so you will not know if you are qualified until you apply.
How Do I Know If I’ll Get Approved?
Just by looking at your finances, you can get a feel for if you are mortgage-eligible or not.
Your odds of getting a mortgage approval are best if:
- You have a credit score of about 620
- You have low debts
- You can come up with a down payment of 3-5%, or more
- You have had a stable income for more than two years
Remember, the rules for mortgage approval are not one size fits all. Each mortgage loan program has different eligibility requirements. Lenders can also make their own rules, allowing some to be more lenient when it comes to loan approval.
If you are still unsure whether you qualify, the best thing to do is speak with a lender.
All mortgage loan programs have different eligibility requirements. Lenders can set their own rules, and some lenders can be more lenient. If you want to know if you qualify, it’s best to check with a lender.
You can usually get a mortgage pre-approval for free within 1-3 days. It will take all the guessing out of which loan program you are qualified for and how much you can borrow for the purchase.
The Process Involved With Mortgage Approval
Most buyers will get pre-approved before they start shopping. After you have signed a purchase agreement and picked a mortgage lender, you will get full mortgage approval. This process has more to it than the pre-approval process.
Underwriting and Approval
There is a lot of waiting involved for home buyers during the mortgage approval process. Once the seller accepts your offer, your lender will usually order an appraisal. After the appraisal, the lender will begin underwriting your mortgage loan.
Your lender will take a deeper look into your finances during the underwriting period.
If you have not already done so in the pre-approval process, you may need to provide your lender with the following:
- Proof of monthly income
- Credit history
- Proof of assets
- Employment history
- Dept-to-income ratio (DTI)
Your loan underwriter will also need you to provide financial documentation. If you did not provide these documents during the pre-approval, you would need to show:
- W-2 forms (or 1099 if you are self-employed)
- Pay stubs
- Tax returns
- Bank statements
- Social Security Number
- Government-issued identification, typically a driver’s license
It is very important that you respond to any requests made by the lender as soon as possible to further speed up the process. Using a mortgage approval checklist can also help you stay organized and on top of the home-buying process.
Checking Your Credit
To make sure your credit has not changed since you were pre-approved, your lender will order hard inquiries of your credit reports from the major credit-reporting bureaus. If the lender did a credit process during the pre-approval and it was less than 90 days ago, the lender may not need to do this again.
There is always a soft approval after the initial approval, regardless of the age of the credit report, to confirm that nothing major has happened. The loan officer will check your credit and make notes of any changes, like new credit cards, car loans, student loans, new monthly debt, or any outstanding debt payments.
It is very important that you do not open up any new lines of credit or take out additional loans during the underwriting process. Any borrowing before your mortgage is approved can affect the outcome, which places your credit and hard work in jeopardy.
Pre-approval vs. Approval
Mortgage pre-approval is similar to loan approval, but pre-approval is when your lender approves you for a certain amount after looking at your finances and credit. When you are issued a pre-approval letter from your loan officer, they are generally good for 60-90 days.
When you are house hunting a pre-approval letter is a must. It will let real estate agents and sellers know that you are a serious buyer. Some agents will not take you to look at a house without first being pre-approved. Getting mortgage pre-approval also indicates the price range of homes you can afford.
Pre-qualification vs. Pre-approval
Mortgage pre-approval and pre-qualification are both useful tools for buyers and those looking to refinance.
A pre-qualification from a lender gives a general estimate of the loan amount you qualify for. Mortgage pre-qualification is based on your reporting of your credit history, monthly income, and other financial details.
Mortgage pre-approval is a more in-depth analysis of your financial status that gives a specific loan amount that your lender is willing to finance.
Conventional Mortgage Approval: Freddie Mac vs. Fannie Mae
Both Fannie Mae and Freddie Mac loans, also known as conforming mortgages, allow credit scores as low as 620. They can also approve mortgages with loan-to-value ratios that are as high as 95-97%. This would mean your down payment would be around 3-5%.
These two corporations also allow mortgages with maximum debt-to-income ratios of 45% under their standard guidelines. Keep in mind, this doesn’t mean you will get approved with a high DTI, poor credit, and a low-down payment.
If you have a lower credit score, they may make your down payment larger. Having a bigger down payment can also help you if your debt-to-income ratio is high (above 36%).
ICE Mortgage Technology Origination Insights Report states the typical borrower using a conventional loan has a 20% down payment and a credit score in the mid-700s.
Conventional Loan Approval Profile
- DTI: 35%
- Down payment: 19%
- LTV ratio: 81%
- FICO score: 755
*This data was from ICE Mortgage Technology Origination Insights Report in September 2021.
FHA Loans and Mortgage Approval
FHA loans follow the Federal Housing Administration’s guidelines and are less restrictive. They can allow credit scores to be as low as 580 to have a down payment of 3.5%, and a 500-credit score to have 10% down.
There is a difference between having low credit and having bad credit. If your credit is low because you have little credit history, too many accounts, or bad history from at least a year ago, you may still qualify with FHA.
Having multiple collections on your record and missing payments makes you too risky. The lender may make you prove that you can handle a monthly mortgage. You can do this by paying all of your monthly debts on time for a minimum of 12 months.
Many lenders will allow you the opportunity to explain missed payments, but too many is an issue that can hurt your chances. Data from the Origination Insights Report indicates that the FHA is more lenient that Conventional loan approval.
FHA borrowers get approved with lower scores, higher debt-to-income ratios, and lower down payments than conventional loan borrowers.
FHA Loan Approval Profile
- DTI: 43%
- Down payment: 5%
- LTV ratio: 95%
- FICO score: 676
*This data was from ICE Mortgage Technology Origination Insights Report in September 2021.
Getting mortgage approval with VA loans
VA loans are backed by the federal government just like FHA loans. Due to the insurance from the U.S. Department of Veterans Affairs, VA loans have more flexibility than conventional conforming loans.
The difference is seen in the average loan approval for VA loans. VA borrowers have lower down payments, lower credit, and higher DTIs than conventional loan borrowers.
VA Loan Approval Profile
- DTI: 40%
- Down payment: 3%
- LTV ratio: 97%
- FICO score: 720
*This data was from ICE Mortgage Technology Origination Insights Report in September 2021.
There Is a Perfect Balance
Your mortgage approval is closely related to your FICO, LTV, and DTI- your credit score, down payment, and your debt-to-income ratio. If one of these areas is low, you will have to make up for it in another area.
This is commonly called “compensating factors” in the mortgage world. An example of compensating factors is if you have a low credit score, you can make up for it with a big down payment or extra cash reserves.
It’s worth talking to a loan officer if you are wondering if you qualify for a mortgage. A loan officer can help by taking a look at your finances and seeing if you would qualify.
Even if you don’t currently qualify, they can help you understand what you need to do before you can get approved. It will give you some things you need to change and how you can get there.
Improving Your Chances of Getting an Approval
Buying a home may not be the best option for you right now if your credit is too low or you have too many debts. However, it could be in a year. Practicing for homeownership now puts you in a better position when you go to buy.
Many different home affordability calculators can help you determine how much you can afford and what your monthly payment will be.
If you are not currently paying for rent, you might not be held to the monthly max typically set with mortgages. This can set you at a lower max payment for purchases.
- Subtract the difference between your new payment and what you currently pay for housing.
- With that difference, pay your debts down to a more manageable amount.
- With your debt under control, pay that much money into a savings account to boost your down payment size.
Doing these steps will help you with several things. It can help you identify what income you will have available once you purchase a house, so your spending can stay under control. It will also help you increase your credit score. If you have a low credit score, lenders may want to stay away from you.
Mortgage Approval FAQ
Does Mortgage Approval Have a Minimum Down Payment?
The typical borrower will need to pay a down payment of around 3-5%. With a VA or USDA loan, you can get approved with no money down. This will only work if you qualify for these loans.
What’s the Lowest Credit Score to Get Mortgage Approval?
Out of all the loan programs, FHA has the lowest credit score minimum. FHA can approve you with a credit score as low as 580. You will need a higher credit score, around 620, to get approved for a conventional conforming loan.
What’s the Minimum Income to Get Approved for a Mortgage?
One good thing about mortgage approval is there is no minimum income amount. Lenders are more concerned with your debt-to-income ratio than your income amount. It would be easier for someone with low income but no debt to get approved than someone with high debt and high income. The lender will also want to see that you have consistent income. They will typically require you to show a two-year work history of steady income and employment.
What Could Stop a Mortgage Approval?
There are a few different things that can stop you from getting a mortgage approved. You can be denied because of inconsistent income or work history, low credit score, or insufficient down payment. All of these factors will vary between lender and loan type. This is why you should shop around and find the programs and lenders that best fit your specific situation.
Does It Take Long to Get Mortgage Approval?
The initial pre-approval can take between 1-3 days. For full mortgage approval, you will have to deal with the underwriting. It varies with the lender, but it can take several days up to a month for this process. They will get an in-depth look at your credit, income, savings, employment, and the property you are planning on buying or refinancing.
