Not everyone who applies for mortgage gets approval. If you, for instance, get in touch with a lender for a pre-qualification, it doesn’t guarantee that you’ll obtain a loan. Mortgage approval is trickier, as the lenders or the underwriters need to review your finances and documentation. This is to make sure that you meet the set guidelines for a specific loan program.
The Mortgage Investors Group and other lenders share some of the basic criteria for approving a loan:
Ability to repay
This involves the evaluation of your income, making sure you have enough to cover a new loan payment and other expenses. Lenders figure this out through your debt-to-income (DTI) ratio, which shows a good balance between your income and debt. Lenders usually prefer borrowers with a DTI smaller than 36%.
Likelihood to repay
The lender will look at your credit score, payment history, and other necessary indicators that you can make and keep up with the mortgage payments in the future. A good credit rating is a common requirement to increase your chances of getting approved.
Amount of down payment
A down payment of 20% or more is usually preferred. You can still get a loan with 20% down, but you are likely to pay private mortgage insurance (PMI). This can increase your monthly loan payment. You may also be required to have two or more loan payment reserves to be able to pay your mortgage in case of unexpected events.
The value of the home
The home’s value will help your lender determine if the loan-to-value ratio (LTV) suits within the guidelines of the mortgage. If you’re applying for a conventional loan, most lenders will require you to have an LTV of less than 80% to 95%. If you have a high LTV ratio, you may still be approved for a mortgage, but this is likely to cost you more.
Lenders use these basic criteria, so it is best to do everything you can to become an attractive borrower. It is also advisable to have an idea of how much loan or monthly payment you can afford comfortably.