Understanding the 5 Steps in Mortgage Approval

When you take out a mortgage to buy a house, the lender uses underwriting to assess your creditworthiness. The objective is to determine the risks involved in the loan before approving your application.

A mortgage broker or loan officer collects documents related to your application. The commercial loan originator verifies your identification, credit history and financial situation such as income, equity investment, financial assets, cash reserves and other risk factors. Some lenders do it manually and some use automated commercial loan underwriter.

Underwriters assess delinquency risk, meaning whether you will be able to repay the mortgage or not. They understand your financial situation by evaluating the following factors:

• Credit score to meet the minimum requirements
• Credit report to check credit history
• Property appraisal to make sure that the lender gets appropriate collateral

In the end, the underwriter documents this assessment. The underwriter determines the acceptable risk.

Let’s see a Fannie Mae’s underwriting guidelines example:

Following are the typically mortgage approval requirements:

• Maximum LTV (Loan-to-value) ratio: 95%
• Maximum DTI (debt-to-income) ratio: 36%
• Credit score: 680 or higher

Sometimes, applicants fall short in some of these areas. The lender may still approve the loan on the basis of the following factors:

• Financial reserves
• DTI ratio
• Type of property and number of units
• Amortization schedule
• Whether the borrower will occupy the property or not
• Credit score
• LTV ratio

If your debt-to-income ratio is 40%, but you have a better credit score then the lender might approve your loan. Or, your credit score is as low as 620 but your LTV ratio is better than 75%, you might get your loan application approved.

The following are the steps involved in getting your mortgage.

Prequalification

In the prequalification stage, the lender reviews your income, debt and credit report. The goal of this stage is to determine the mortgage that fits your budget.

If you are considering a mortgage in the near future, pull your credit report from all credit bureaus and check your credit score.

Income Verification and Documents

The lender asks for financial documentation such as bank account statements and tax returns to verify your income. A loan processor confirms this information. The lender issues a preapproval letter to inform you of the amount you can borrow. This amount is determined on the basis of the information you provide. You can show this preapproval letter to the seller to show that you are seriously interested in the property.

Appraisal

After you make an offer, the lender conducts a property appraisal. This is done to determine the actual value of the property. The property appraisal cost depends on the size and complexity of the property. This cost may vary from several hundred to more than a thousand dollars.

Title Search and Title Insurance

A property with legal claims is a risky property. This is the reason why title search is very critical. The title company checks the history of the property to look for:

• Mortgages
• Liens
• Claims
• Zoning ordinance
• Easement rights
• Pending legal action
• Restrictive covenants
• Unpaid taxes

The title insurer guarantees the accuracy of the research by issuing an insurance policy. In some cases, there is one policy for the protection of the owner and the second to protect the lender.

Underwriting

Once the application is reviewed manually or using an automated commercial loan underwriter, your mortgage application will be approved, denied, suspended or approved with conditions.