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In July 2021 alone, more than 700,000 new home sales were processed. While that sounds like a lot, the number is lower compared to 2020, due in part to a housing shortage. Pair that shortage with plenty of people looking to make a home purchase and you have a competitive market in 2021 and beyond.Â
You might think that these are just numbers—but understanding the housing market is pivotal to the mortgage approval process. If you’re considering buying a home, we’re here to guide you through the mortgage process. Get ready to be set up for success.Â
The home loan approval process includes a pretty thorough credit check. While you might be able to get approved for an FHA mortgage loan with a credit score as low as 500, most traditional mortgage loans require at least a 620 or higher.
While your credit score might make or break you at the beginning of a mortgage application process, once you continue the process, your entire credit history becomes important. Mortgage lenders look at issues such as delinquencies or open collections accounts on your credit history. They may also require that you make good on any open collections accounts before your mortgage approval can go through.
It’s a good idea to understand your credit history and score months before you plan to apply for a home loan. That way, you have time to resolve any issues or dispute inaccurate negative information that could be dragging your score down.Â
You can get a free credit report from each of the major credit bureaus at AnnualCreditReport.com. You can also sign up for services such as ExtraCredit to get ongoing access to your credit reports and scores. ExtraCredit also includes features such as Build It that help you work on building your credit so you have a better chance at getting the mortgage loan—and rates—you want in the future.
Your credit isn’t the only financial factor that impacts your mortgage application process. Yes, your history of on-time payments to other creditors is important. But so is your ability to make payments on the mortgage loan in the future. Lenders are likely to be concerned with:
Understanding what mortgage lenders look at when considering you for a home loan could proactively help your case. Start early and work on reducing debt, increasing income and saving money for your down payment.
When you’re close to ready to start looking for a house and applying for a mortgage, take time to get an idea of how much mortgage you can actually afford. Start by taking a look at your budget—or create one if you don’t already have one.
Try to factor in expenses related to a new home, including savings for emergency repairs or maintenance. Once you know how much of a monthly payment you can afford, use an online mortgage calculator to test various loan and interest amounts. This helps you figure out your limits for home price, so you look for properties you can afford.
Armed with knowledge about your budget, your credit and your overall financial status, hopefully you’re ready to do some research. Don’t apply yet—you want to apply for mortgages when you’re ready to make an offer on a home.Â
In the meantime, do some research. Talk to your bank, and maybe even reach out to a mortgage broker. That way, you’ll know your options and what you might qualify for.
During your research, make notes about what documents and items a mortgage lender requires for the application. Gather those documents and information before you apply for preapproval or a mortgage. You’ll save major time and hassle during the home loan approval process.
Some items you might need include:
You may be asked for other items or documents throughout the mortgage underwriting process. When you apply for a mortgage make sure you’re available via email or phone, in case lenders have extra questions for you.Â
Getting pre-approved for a mortgage can be a good step. Preapproval doesn’t mean you’ve successfully completed the entire mortgage approval process. However, it does mean the lender did a cursory review of your credit history and score—as well as any income information you reported—and is fairly comfortable saying you’ll be approved with a certainrate.Â
Preapproval letters let you shop more confidently for a home. They also help demonstrate to sellers that you’re serious about your offer and will probably follow through without financial hiccups. In a competitive market with numerous offers on each home, this can make your offer more attractive to some sellers.
Finally, once you’re ready to purchase a home, ensure you apply for mortgages within a short period of time. Each time you apply for a loan, your credit is hit with a hard inquiry—which will bring your score down a bit. But the credit scoring models treat multiple mortgage applications within a short period of time as a single hard inquiry, because it’s assumed you may want to shop around for a good deal.
You should also be ready for the prospect of being approved with conditions. This means the mortgage lender will approve your loan as long as you meet certain conditions, which could include:
Ultimately, being successful with the home loan application process comes down to being prepared and in good financial standing—or as in as good financial standing as you can. If you’ve gone through the above steps and are ready to apply for a mortgage, consider shopping for rates today.
December 13, 2023
Mortgages
June 7, 2021
Mortgages