The first step in the home buying process is obtaining a preapproval letter.
Very few, if any, real estate agents will show you a property without a preapproval letter from a local lender or mortgage broker. It is not enough to run the numbers and think you can afford the property. You need to provide written documentation from your lender supporting your application.
There are three key approval areas that every lender looks at. The credit report, debt to income ratio and amount of assets will often determine the strength of your application and which programs you are qualified for. If you are weak in just one of these areas it could impact your application. Here is what most lenders look for.
Credit Report. Your credit report is the starting point for your loan application. Everything revolves around your score and the types of liabilities you have. The score itself is the number one factor and can range anywhere from 350 to 849. Most loan programs require a minimum score of 600. Anything over 720 is considered excellent and should give you a wide range of options. A 714 score as opposed to a 722 can make a huge difference in what programs are available and even the interest rate offered.The information inside the report is also important. Depending on the program, there may be a minimum number of accounts needed and a minimum amount of time per each account. The credit report will also show if there are any old liens, collections or charge offs. A clean credit report with strong scores allows you to move forward. Below average scores with minimal accounts could be too much to overcome.
Debt to Income.One of the reasons the loan application process is so intimidating is that there are many calculations involved. Perhaps the most important calculation is the debt to income ratio. Having a good salary and steady employment are important but far from enough. If you have excessive debt your strong income may not matter. To calculate the debt to income ratio lenders take your gross annual income amount and divide it by twelve to get a monthly number. They add up all of the minimum monthly payments on your credit report plus your proposed loan payment and divide that by your monthly gross income amount. The desired number varies based on the program and the lender but typically needs to be under 50%. If the debt greatly exceeds the income, you will have trouble finding a program that fits your profile. Your options are that point would be to either add a co-borrower or see if there is a way to pay down some debt. With stated income loans a thing of the past, high debt to income can be a deal breaker.
Assets/Down Payment.The final major piece in the approval puzzle is the amount of available assets and down payment. A large down payment can erase many other problems with your loan application. There are certain lenders that offer approvals with scores below 600 if the down payment is high enough. There are also programs with as little as 3.5% down. Some programs require that 100% of the down payment comes from your funds without any gifts. Not only does this money need to be in your account but it has to be what is called seasoned for at least 60 days. Pulling funds from other accounts a few weeks before the closing may not be allowed. You may also need to have money in addition to what is required at the closing. Having six months of your mortgage payment in reserves may be a requirement to close. In most cases any funds needed have to be in your account before your loan is submitted.
As much as the loan process has changed it still revolves around these three core areas. If you are interested in buying a house you need to reach out to a lender or mortgage broker and find out exactly what you can do.