There’s no shortcut to getting approved for a home loan. Buyers need to satisfy the requirements of lenders, proving their ability to provide a down payment and keep up with mortgage payments. Refer to this guide for the steps on how to get approved for a home loan.
Research Mortgage Lenders
The first step to getting approved for a home loan is finding a lender that offers a pre-approval letter. It’s recommended to get at least three preapproval letters from different lenders. These letters make it possible to compare:
- Loan amounts
- Interest rates
- Various closing costs
If possible, get referrals from friends or family members. Spreading applications out over small banks, major mortgage companies, and local credit unions offers a good range of options.
Get a Preapproval Letter From a Mortgage Lender
Preapproval is the first “unofficial” step to getting a mortgage. Most real estate agents will only show properties to someone who is pre-approved for a home loan. Getting a home loan pre-approved also shows a buyer “how much home” they can afford.
Is It Better to Get Prequalified or Preapproved?
Hopeful buyers can use a pre-qualification when looking for a preliminary overview of personal buying power. However, it doesn’t hold the weight of a preapproval letter.
Unlike pre-qualifying for a mortgage by getting a rough estimate, getting a preapproval letter requires an extensive application. Lenders check credit, verify assets, and confirm employment before issuing preapproval letters.
What do I need for pre-approval? In addition to completing a mortgage application, a buyer must also submit the following:
- Proof of assets: Includes bank and investment statements proving a borrower can cover a down payment, closing costs, and other costs. For borrowers hoping to avoid PMI (private mortgage insurance), putting down 20% is necessary.
- Confirmation of income: Can include W-2 wage statements, tax returns from the past two years, recent pay stubs showing year-to-date earnings, and proof of other income sources.
- Proof of credit: When pulling a borrower’s credit score, a lender is looking for a minimum credit score of either 620 (conventional loan) or 580 (FHA loan).
- Employment verification: Lenders may call an employer listed on a mortgage application to confirm employment status and salary.
- Proof of self-employment income: If self-employed, a borrower will need to provide documentation of income and financial strength.
Once a buyer has submitted for mortgage pre-approval, the lender will provide a maximum loan amount a buyer is likely to be approved for when completing a final mortgage application.
What to Do If a Mortgage Preapproval Is Denied
If you have a preapproval letter, it’s time to find a real estate agent to help you browse properties. If you failed to meet mortgage pre-approval requirements, fix this by either providing missing documents or correcting the financial issue that caused the denial.
Most lenders provide suggestions for how a borrower can improve their chance of being approved.
Denials are often caused by having a debt-to-income (DTI) ratio that is too high. DTI refers to the percentage of a borrower’s gross monthly income that goes toward paying monthly debts. It basically weighs money going in against money going out. Payments lenders look at include housing, credit card, loan repayments, and child support.
While the general rule is to keep DTI below 43%, most lenders like to see a DTI no higher than 36%. Of that 36%, just 28% should be going toward an existing rent or mortgage payment. Some ways to decrease DTI include:
- Paying off credit cards.
- Making larger payments toward debts to pay down balances quickly.
- Avoiding any additional debt.
- Asking creditors to reduce interest rates to create smaller monthly payments.
- Increasing income.
Another common reason for a denied mortgage preapproval is a low credit score. Here’s what goes into a credit score:
- Length of credit history
- History of on-time payments
- How credit is utilized
- Number of recently opened accounts
Keep credit utilization below 30% when following the steps for how to get approved for a home loan. Credit utilization refers to how much credit is being used in relation to spending power. For example, someone charging $3,000 per month on a card with a limit of $10,000 is at 30% credit utilization.
Some ways to boost credit score to get a mortgage include:
- Dispute any inaccurate information on a credit report.
- Pay down balances on credit cards.
- Ask to have credit limits on cards increased to instantly reduce credit utilization by default.
- If credit is nonexistent, ask to become an authorized user on a family member’s card.
- Pay all bills on time.
- If facing collections, contact collectors to see if they will stop reporting charges in exchange for full payment.
- Use a secured cash-based credit card from a bank.
- Begin having rent and utility payments reported to credit agencies.
- Avoid closing any credit cards.
You can anticipate credit issues before going through the mortgage preapproval process by requesting a free report from all three major credit bureaus. Check for errors, issues you can correct, or negative activity that is too old to remain on a credit report. Most negative information phases out after seven to 10 years.
What to Do After Being Pre-Approved for a Home Loan
Most preapproval letters are valid for 90 days. This provides a 90-day window for making an offer before you’ll need to apply again. Here’s what the journey from preapproval to mortgage closing might look like:
- Getting a real estate agent
- House searching within the preapproval price range
- Making an offer
- Signing a purchase agreement
Next, a buyer returns to the lender with a signed purchase agreement in hand to complete the mortgage process. The signed agreement is essential because the lender will use it for the appraisal, ensuring a borrower’s offer aligns with the home’s value.
Getting Approved for a Home Loan After Making an Offer
While there’s no obligation to complete the loan process with the lender that provided the preapproval letter, it’s the most common option. It’s also the simplest because the lender will already have the information they need to complete the loan process on file.
Mortgage Steps After Preapproval
Lenders may ask for additional documentation at this stage. Once buyers submit all key pieces of information for a mortgage application, the lender will provide borrowers with something called a loan estimate within three business days.
Like a preapproval letter, a loan estimate isn’t an official offer. It only sets up expectations. Even a loan estimate with a rate lock is not an official offer. Here’s what to do after getting a loan estimate:
- Read it carefully.
- Confirm that the loan offered mirrors the loan discussed with a loan officer.
- Check if the interest rate is locked. If the rate is locked, it won’t change between the offer date and closing as long as you close by the date specified on the document. If the rate isn’t locked, it may.
During the underwriting process, a lender may ask for updated bank statements or pay stubs to confirm that a borrower’s financial situation has not changed since the preapproval was given. When obtaining a federally guaranteed loan, a borrower may also need to submit the paperwork required by the Federal Housing Administration (FHA).
If using gift money for a down payment, a borrower must provide a letter from the giver stating that the money is a gift and not a loan.
Lenders may also ask for clarification during the underwriting process. For example, they may request a written letter of explanation to explain a specific bank transaction.
While a mortgage approval is likely as long as there are no significant changes to a borrower’s financial situation since the preapproval, buyers should avoid making large purchases between getting preapproved and closing day. A new car loan, student loan, or expensive vacation could cause the bank to deny the application.
Mortgage Loan Closing
Finally, the lender will issue a closing date once the buyer has fulfilled all requirements for proof and documentation.
By law, all mortgage providers must submit a five-page form called a closing disclosure at least three business days before a loan’s closing date. A closing disclosure details loan terms, a borrower’s projected monthly payments, and total fees and closing costs.
The purpose of the three-day window is to provide borrowers with enough time to compare their final loan costs to previous cost estimates provided by a lender. A borrower can also bring questions to a lender during this window.
In addition to helping borrowers make informed decisions, this form also tells them how much cash to bring to closing.
A buyer always has a right to start over with a new mortgage provider up until closing if they are unhappy with the terms of service. However, switching lenders can lead to delays in the closing process stemming from a new application review, new guidelines, and changes in closing costs.