What Lenders Want... 3 Keys to Getting Approved

As you look to get preapproved, it's important to understand what lender's want and deliver it, so you can get what you want... the money you want to purchase your next home at the lowest interest rate and lowest costs possible.

The Major Criteria

The major criteria of qualifying for a mortgage:

Debt to Income Ratio (DTI) - Ability to Repay

The most important criteria in qualifying for home loan is your ability repay the borrowed funds. Even individuals with high net worth and lots of cash, can have trouble qualifying for a loan if they do not have evidence of sufficient income which would allow them to repay the loan. In an ideal world, lenders like to see borrowers with the Housing Payment Ratio of less than 33% of their Gross Monthly Income (GMI - the monthly sum of the "top line" of your paycheck). After maximum, lenders are looking for your Total Debt Ratio, the combination of your housing payment and any other debt payments, to be no more than approximately 48 to 52% of your GMI. For example, if your household GMI is $10,000 per month, and you have student loan payments of totaling $750 per month and car payments totaling $1000 per month, the lender may say your maximum housing payment could be $3,450 per month [($10,000 * 52%) - ($1,000 + 750) = $3,450].

Assets - Down Payment & Reserves

The second criteria is your down payment & assets. Lenders want to see you invest in the property through a down payment, the higher your down payment the lower their risk and therefore the lower your interest rate, mortgage insurance and closing costs. Additionally, they want to make sure you have reserves on hand to ensure your ability to pay the mortgage during troubling times.

Credit Score - History & Prediction of Habits

Finally, lenders use your credit score to determine your known history of managing credit and debts, and the forecasted ability of you to pay future debts. The higher your credit score, the lower their perception of risk and the more beneficial your rates and fees will be.

It should be noted, we listed these criteria in order of importance. One of the most common misconceptions of qualifying for a mortgage is the belief high levels of cash or other liquid assets absolutely ensure qualification for a mortgage. In reality, unless large sums of assets are accompanied with sufficient income, it can be difficult to qualify for mortgage. When borrowers have modest income, and I assets, sometimes they will need to borrow against their assets and/or restructure their assets to create sufficient income needed to document ability to repay borrowed funds.

3 Steps to Preapproval

Since your ability to get the best rate and fees for your loan is based on your ability to satisfy the lender's requirements and reduce their perception of risk, you will want to be thoroughly prepared to do the following:

Mortgage Application

Complete an online mortgage application which will allow the lender to check your credit score and review your personal disclosures of income and assets. This mortgage application will allow them to "prequalify" you for mortgage – providing you a basic estimate of your ability to borrow. It's important to note this prequalification is not a written approval, and because of its lack of verification through documentation is not an effective tool in negotiation of a purchase. In order to obtain preapproval, you'll need to take the additional steps of proving income and assets.

Proof of Income

Most Recent Two Months of Income Statements – these might be pay stubs, investment distribution statements and/or profit and loss reports from businesses or partnerships.

Most Recent Two Years of Tax Returns – complete copies of the last two years of tax returns you have filed, along with any tax disclosure documentation you received for the current year (if you are applying for mortgage in the months of January to April or have not yet filed your taxes for the current year).

Proving income can be very easy for many individuals who obtain income through "W-2" employment. However it can be a bit more complex for those whom are self-employed, contract employed or owners/partners of a business.  A great loan officer can quickly and easily walk you through the process of proving income for those more complex scenarios.

Proof of Assets

Most Recent Two Months of Bank, Investment & Asset Statements – these may be bank statements, brokerage statements or a balance sheet for a business or partnership.

Gift Letter – for those obtaining a gift for a down payment, the lender may request a signed gift letter stating the gift giver does not expect to be repaid (since repayment would essentially be a loan and the associated payment/liability then need to be calculated in your debt to income ratio).

These three steps cover the major elements of preapproval for most homebuyers. In each loan application and underwriting process, lenders may ask for more specifics on certain areas of income, assets and credit history. So be prepared to answer questions as you go through the process. We know answering questions and follow-up questions can be annoying, but keep in mind your loan is being underwritten (in nearly all circumstances) to national standards and therefore the questions being asked are most often required in order to be eligible for the loan.

As always, we hope this information is helpful, and encourage you to contact us with your questions so we might help you make the process of getting preapproved for your next home purchase a bit easier.