Mortgage Approval: Steps and Essential Documents

Getting approved for a mortgage is an important step in achieving homeownership. With mortgage approval, you can purchase your dream home and begin building equity. However, the mortgage approval process can be complex and competitive. Understanding what lenders look for and taking the right steps can significantly improve your chances of getting approved. This comprehensive guide will walk you through the mortgage approval process from start to finish. 

Why is Getting Approved for a Mortgage Important?

Getting approved for a mortgage allows you to purchase real estate through financing from a lender. With a mortgage, you can buy a home without paying the full price upfront. Instead, you make a down payment on the home and take out a loan for the remaining balance, which you pay back over time with interest.

There are several key benefits to getting approved for a mortgage:

• Build equity: As you pay down your mortgage loan, you build equity in your home. Equity is the portion of the home you own outright.
• Fixed payments: Mortgage payments remain the same over the life of the loan (for fixed-rate mortgages), providing stability.
• Tax benefits: You may be able to deduct mortgage interest and property taxes from your income taxes.
• Purchase power: A mortgage allows you to buy a more expensive home than you could with cash alone.

Without mortgage approval, it is very difficult to purchase real estate. Renting tends to be more expensive over the long-term than buying with a mortgage. That’s why getting approved is so critical for homebuyers.

1. Check Your Credit Score

Your credit score is one of the most important factors mortgage lenders consider, so checking it should be your first step. According to the Consumer Financial Protection Bureau, credit history and credit score are the top reasons borrowers get denied for mortgages.

The most commonly used credit scores are from FICO and range from 300 to 850. In general, the higher your score, the better. Applicants with credit scores of 760 or above have a 93% chance of approval, while those below 620 have just a 29% chance, according to Ellie Mae data.

Here are some tips for checking and improving your credit score:

• Obtain copies of your credit reports from AnnualCreditReport.com to review your history. Look for any errors that may be hurting your score.
• Try to lower credit card balances and avoid new inquiries in the months leading up to your application.
• Pay all bills on time to build a strong payment history, which is the biggest factor in your score.
• Consider signing up for credit monitoring to track your score over time.

Start checking and optimizing your credit several months before applying for a pre-approval or mortgage. This gives you time to correct any issues. Aim for a minimum score of 680.

2. Save for a Down Payment

Along with your credit score, the down payment is crucial for mortgage approval. Lenders want to see you have “skin in the game.”

The minimum down payment to qualify for a conventional mortgage is typically 3-5%. However, 20% down or more will give you the best approval odds and rates, per the Consumer Financial Protection Bureau. The average down payment for first-time homebuyers is around 6.8%, according to the National Association of Realtors.

Here are some tips for saving for your down payment:

• Aim for 20% if possible. This avoids private mortgage insurance (PMI).
• Build savings of at least 5% to qualify for an FHA or VA loan. These have lower down payment requirements.
• Consider using gift funds from family members. Lenders allow this with proper documentation.
• Look into down payment assistance programs offered in your state. These provide grants or loans to qualifying buyers.

Give yourself several months to accumulate down payment funds. Reducing other debts can help you save more each month.

3. Determine Your Budget

To get mortgage approval, you must convince the lender you can afford the monthly payments. Take time to analyze your finances and determine a comfortable payment range.

Consider factors like:

• Income – Review your paystubs and account for all sources of income. Verify job stability.
• Fixed expenses – Tally monthly costs like debt payments, insurance, utilities.
• Variable expenses – Estimate averages for costs like food, gas, entertainment.
• Down payment and closing costs – Factor them into your overall budget.
• Leeway for unexpected costs – Leave wiggle room in your budget.

The general mortgage approval guideline is that total debt payments should not exceed 43% of your gross monthly income. However, lenders may deny applicants when over 36%. Run the numbers to find your maximum payment.

4. Get Pre-Approved for a Loan

Pre-approval is an important early step that shows sellers you are ready to buy. It also gives you bargaining power to make competitive offers.

Here’s how it works:

• You apply by submitting financial documents so the lender can analyze your creditworthiness. 
• The lender provides a pre-approval letter estimating the loan amount you qualify for.
• The lender fully verifies income, assets, and debts later during underwriting. Pre-approval is not a guarantee of final approval.

Aim to get pre-approved before you start seriously house hunting. This will make the process smoother once you find the right home.

5. Choose the Right Type of Mortgage

There are several mortgage options to consider:

Conventional loans – Standard mortgages with down payments under 20%. PMI may be required.

FHA loans – Backed by the Federal Housing Administration. Only 3.5% down required. 

VA loans – For qualifying military veterans and spouses. Zero down payment options. 

USDA loans – For properties in rural areas. No down payment needed.

Jumbo loans – For luxury homes above conventional loan limits. Typically require 10% to 20% down.

Consider which programs you may qualify for based on your finances, military service, home location, and other factors. Your loan officer can help you choose the optimal loan type.

6. Shop Around for the Best Rates

Mortgage rates vary significantly from lender to lender. The lowest rate could save you tens of thousands over your loan term.

Strategies for finding the best rate:

• Get rate quotes from several lender websites to compare.
• Work with an independent mortgage broker who can access multiple lenders.
• Ask your bank or credit union if they can beat another lender’s offer.
• Be vigilant – monitor daily rate changes and lock when you see a competitive low.

Take the time to shop around – it will pay dividends. Continue rate shopping even during underwriting to try and improve your initial approved rate.

7. Submit Your Application

Once you have a home under contract, it’s time to submit a full mortgage application with your chosen lender. This involves providing extensive documents so the lender can verify all details of your financial picture.

Key items you’ll need to submit:

• W2s and tax returns for past 2 years 
• At least 30 days of pay stubs
• 2 to 3 months of bank statements
• Details on all assets and debts
• Home appraisal
• Earnest money deposit documentation
• Identification

It can take weeks or months to collect and submit everything needed. Use a checklist to stay organized and follow up frequently with your loan officer. Providing complete, accurate documentation is vital for timely approval.

8. Wait for Approval

After submitting your full application, the final step is to wait for underwriting approval. The lender will thoroughly analyze your credit, income, assets, debts, and home value to make the final decision.

This underwriting period takes anywhere from 2 to 8 weeks for most applicants. It may take longer if the lender requests additional documentation.

Check in regularly with your loan officer for status updates. Be patient and try to avoid new credit inquiries or purchases during this critical period.

Once approved, you will receive a clear to close notice with your finalized terms. Then you can move forward with closing on your new home!

What are the Requirements to Get Approved for a Mortgage?

While mortgage requirements vary by lender and loan type, there are some typical qualifications needed for approval:

• Minimum credit score of 620 or higher. 680+ scores improve your rate and chances.
• Stable employment history and income. At least 2 years with the same employer is ideal.
• Debt-to-income ratio below 43% in most cases. The lower the better.
• Sufficient savings and cash reserves. At least 3 months of mortgage payments in reserve is recommended.
• Not exceeding conforming loan limits. Varies by metro area, typically $647,200 for single family homes.
• Down payment funds that are fully documented. Typically 3-20% of purchase price.

Meeting these mortgage approval benchmarks will put you in a strong position. Exceeding them whenever possible is wise.

What Factors Can Affect Your Mortgage Approval?

Many personal financial factors influence whether lenders will approve your mortgage request, including:

• Credit history – Late payments and high balances hurt. Multiple mortgage inquiries also lower odds.
• Credit mix – Installment and revolving accounts are ideal. Lack of mix raises risk.
• Debt-to-income ratio – Approval chances fall around 2% for every 1% DTI rises above 43%, per the Mortgage Bankers Association.
• Assets and reserves – Large non-retirement assets and ample cash reserves are pluses.
• Down payment amount – The more, the better. At least 5% typically needed. 20% ideal.
• Loan type – Conventional, FHA, VA, USDA, jumbo – each has different requirements.
• Property – Condition, location, and appraisal value factor in.

Having a strong financial profile across these areas will optimize mortgage approval success. Work on weak spots early in the process.

How Long Does It Take to Get Approved for a Mortgage?

From initially applying through closing, the mortgage approval timeline typically spans 45 to 90 days, including these key steps:

• Pre-approval – 1 to 2 weeks to get pre-approved.
• House hunting – 2 to 4 weeks is common.
• Underwriting – Lenders review complete application for 2 to 8 weeks.
• Closing – 1 to 2 weeks to close after final approval.

So in total, expect the mortgage process to take 6 to 12 weeks in most cases. It can be shorter with an ideal application or longer if issues arise. Let your loan officer know your desired timeframe.

Can You Get Denied After Pre-Approval?

Yes, it is possible to get denied for a mortgage even after pre-approval. Pre-approval is preliminary based on limited documentation.

During underwriting, lenders verify all details of income, employment, assets, debts, credit, and the property. Any inaccuracies or red flags could lead to denial of your final mortgage approval.

That’s why it’s crucial to be completely truthful when applying for pre-approval. Provide updated documentation during underwriting. And avoid major financial changes until after closing.

If you do get denied after pre-approval, immediately contact your loan officer to determine the issue and your options to appeal or re-apply.

What Should You Do If You’re Denied a Mortgage?

If your mortgage application is denied, stay calm, get specifics on why, and take these steps:

• Ask the lender to mail you an official denial letter. This outlines the reason(s) for denial. 
• Review the reasons – credit, debts, income, etc. Identify which factor is hurting you most.
• Order updated copies of your credit reports to check for errors or red flags. Dispute any inaccuracies.
• If needed, pay down high balances, increase your down payment savings, or take other steps to improve your financial profile.
• Consult credit counseling services to create a plan to strengthen your application.
• After 6 months or more of improving your financial position, consider re-applying with the same or alternate lenders.

With focus on boosting your trouble areas, many initially denied applicants can qualify on a subsequent try. Discuss available options with loan officers.

What Are Some Tips to Improve Your Chances of Getting Approved?

Here are key tips for getting greenlit for a mortgage:

• Maintain a credit score over 740 – The higher the better. Pay bills on time always.
• Lower credit card balances below 30% of limits. Pay down balances instead of moving debt around.
• Save for a down payment of at least 10% to 20%. More down = lower monthly payments. 
• Keep total debt-to-income ratio below 36%. Higher ratios lead to more denials. Live below your means.
• Avoid new credit inquiries for 12 months prior to applying for a mortgage. Too many inquiries can lower your approval odds.
• Get pre-qualified to uncover any issues early. Then time to correct them and boost your case.

Meeting these mortgage approval guidelines will put the odds of getting approved in your favor.

Can You Negotiate Mortgage Rates?

Yes, negotiating mortgage rates is possible in certain situations. The ability to negotiate depends on factors like your finances, the lender, and market conditions.

Those able to negotiate rates most effectively typically have:

• Excellent credit and income
• Large down payments and cash reserves 
• Existing relationship with lender
• Willingness to shop competitors’ offers

Negotiation strategies involve:

• Getting multiple rate quotes to compare
• Pointing out whenever a competitor has a lower fee or rate 
• Asking the lender directly if they can beat the competitor’s rate
• Adjusting your loan program, points, or other factors to find the optimal rate 

Having negotiating leverage through competition allows you to potentially save 0.125% to 0.25% or more off your mortgage rate if you negotiate effectively.

Is It Easier to Get Approved For A Refinance Than A Purchase?

In most cases, it is easier to get approved when refinancing your mortgage vs. getting approved for a new purchase.

Key factors that improve chances for a refinance include:

• Established payment history with current lender
• Existing equity in the home
• No need to be approved for a larger loan amount
• Underwriting primarily based on credit score and home value rather than other purchase factors

However, extensive cash-out refinances involving accessing your home’s equity do face greater scrutiny. And market conditions like rising rates reduce overall refi approval odds.

In general, you have more approval leeway when refinancing with your current lender versus being approved for a mortgage with a new lender. Discuss your specific situation to determine if refinancing may be a better option.

Conclusion

Getting approved for a mortgage to buy a home is an intricate process with many variables. But by methodically following the steps outlined here and improving your financial standing, your chances of getting the green light are much higher.

Aim to: check your credit; save for a robust down payment; stay on top of your budget and debts; obtain pre-approval; shop competitive rates; submit a strong application; and correct any issues quickly if your initial application is denied.

With diligent preparation and persistence, you can get approved for the mortgage that makes your dream of homeownership a reality.