Taking out a mortgage is an inevitable decision you will have to make to get one step closer to your goal of finally getting the home of your dreams or the property you always wanted to have.
You will undoubtedly encounter some sophisticated and even unclear procedures and conditions that can be easily understood, provided you know how the whole process plays out.
First, you need to know one thing: “How to get approved for a mortgage?”
The best way to get approved for a mortgage is to have a good credit score and a low debt-to-income ratio. Your credit score is one of the most important factors that lenders look at when approving a mortgage. Your debt-to-income ratio is also important, because it shows how much of your income goes towards paying debts each month.
Each of the mentioned terms has distinct characteristics that will help you understand your role regarding an eventual mortgage approval.
I will go over each set of factors in detail for you to get a grasp of what the lenders are looking for in a potential client and how to maximize your chances.
By the end of the article, you will know everything you need to get approved for a mortgage!
How to Get Approved for a Mortgage?
As I already made clear, your ability to cover each monthly mortgage payment on time is of utmost importance to the lender and will prove critical when you apply for a mortgage.
Respectively, factors that reflect your financial situation and your trustworthiness as a payer carry the most weight. I will look into each one to give you an idea of how you stack up based on every single aspect.
Like it or not, your income is the first thing the lenders will look at to determine whether you qualify for a mortgage type. Your employment history is essential, but a steady cash flow is an obligatory condition regardless of the source of income. The higher the income, the lesser the risk for the lender, and the better your chances of getting approved.
Your credit score is arguably the one component of the lender criteria that has a tremendous impact on whether you will get the mortgage of your choice or not. It is indicative of your payment history and your finance management, so having a good enough credit score (of at least 580 based on the type of loan) is a must.
Your debt-to-income ratio (DTI) is another aspect of your financial situation. It is calculated by dividing the total amount consisting of your monthly debt payments by your total monthly income.
Expenses such as funds spent on groceries, subscriptions, or online orders aren’t taken into account. On the contrary, recurring charges like credit card statements should be factored into calculating your DTI. To secure a conventional mortgage, you should aim for a DTI of 50% or less, although some mortgage types may require a lower threshold.
Another factor that will benefit your mortgage approval is the assets at your disposal. The term refers to any account type you can draw cash from, like a savings account, a retirement account, and taxable investments.
Last but not least, the property type you intend to acquire will also affect your chances of getting approved for a mortgage. If you are purchasing a property with the sole goal of making it your home, it is clear to the lender that a substantial part of your budget will go toward covering the monthly mortgage payment.
However, if you buy a residence as an investment, it is more likely to be inconsistent with paying the compulsory monthly fees. In such cases, the lender demands a larger down payment. A higher credit score may also be necessary.
What Documents Do I Need to Get Approved for a Mortgage?
The following documents will considerably facilitate the process of applying for a mortgage. As I mentioned at the beginning of the article, they verify the authenticity of the factors that define your mortgage qualification.
The first set of documents proves your ability to cover the eventual monthly payments and is known as proof of income. The necessary paperwork consists of different document types depending on your situation. Examples are federal tax forms, W-2s and pay stubs, 1099 forms, or profit and loss statements when you are self-employed and legal documentation confirming you will be receiving payments for at least another three years.
Your credit report is another document that the lender will need to look into to assess your financial situation. If your credit score has been decreased due to unforeseen circumstances such as a medical emergency, it is wise to discuss the case with your lender.
Providing proof of assets and liabilities is another necessary condition. Examples are statements confirming the balance in your savings, checking accounts, your retirement or investment account, proof of funds that have been gifted to you, and documentation confirming assets transfer. Your lender will also request additional information on debts you currently have.
What Happens After I Get Approved for a Mortgage?
Once the assessment of your financial situation is completed and you get approved for a mortgage, you are ready to begin your search for the home or property you have always dreamed of owning!
The process of getting approved for a mortgage isn’t as overwhelming as it may initially seem. The whole procedure is indeed complex and demanding as far as conditions regarding the financial situation of the future homeowner. However, once you objectively look at every step that makes up the process, it is more than manageable to qualify for the mortgage type of choice.
If you have a stable and well-paid job, a satisfactory credit history, and excellent budget management, you are way on your way to fulfilling your goal of getting a mortgage.
Being financially responsible will provide you with an invaluable advantage. Possessing such quality may ultimately be the primary reason pushing you far and ensuring that you will receive the perfect property you have wished to own.