This BLOG On What Factors Affect Pre-Approval And Stress During Mortgage Process Was UPDATED And PUBLISHED On September 5th, 2019
Once homebuyers have committed themselves to purchase a home, the next step is to qualify for a home loan. Buyers need to see how much down payment and closing costs they need and how much they qualify for.
- Homebuyers need to get qualified and get a pre-approval letter in order to start shopping for homes
- Sellers and seller’s realtors will not show properties if the home buyer is not armed with a solid pre-approval letter
- Most sellers and seller’s realtors will no longer accept a pre-qualification letter
- Pre-qualification letters are becoming more and more extinct
- This because nobody hardly accepts them anymore
- Most mortgage lenders stop issuing pre-qualification letters altogether since they no longer carry any weight
In this article, we will cover and discuss What Factors Affect Pre-Approval And Stress During Mortgage Process.
Underwriting Are Factors Affect Pre-Approval
A pre-approval letter is a letter from a mortgage lender that states borrower has been pre-approved for a mortgage loan.
- Pre-Approval Letter states that borrowers mortgage loan application, credit, and income has been reviewed by the lender and the borrower qualifies for a mortgage
- The amount of the loan, down payment, interest rate, type of loan are all stated on the pre-approval letter
- Big Factors Affect Pre-Approval is whether the pre-approval has been fully underwritten and signed off by the mortgage underwriter or if the loan officer signed off on the pre-approval letter
- Technically, a solid pre-approval letter needs to be fully underwritten and signed by a mortgage underwriter
- Loan Officers are allowed to issue pre-qualification letters but not pre-approvals
- All pre-approvals at Gustan Cho Associates Mortgage Group is fully underwritten and signed off by our mortgage underwriters
The biggest and number one reason for a last-minute mortgage denial and/or stress during the mortgage process is because borrowers were not properly qualified.
Negative Factors Affect Pre-Approval Is Getting It Issued By Loan Officers
A pre-approval should not be issued in a matter of minutes by a loan officer.
- A mortgage loan originator can decide to run the mortgage application and credit through Fannie Mae’s Automated Underwriting System to see if the applicant can get an approve/eligible per DU FINDINGS
- Most mortgage loan originators will run through DU for mortgage loan applicants with challenging credit, low credit scores, and high debt to income ratios
- An approve/eligible per DU FINDINGS carry a lot of weight
- There are lenders where they have no mortgage lender overlays and will just go off DU FINDINGS
- An approve/eligible is the final approval as long as borrowers can provide conditions listed on the automated approval report
- There are several factors that determine a pre-qualification
A pre-approval letter should not be issued by loan officers. All pre-approvals at Gustan Cho Associates Mortgage Group are fully underwritten and are issued by our mortgage underwriters.
Credit Scores And Credit Report
There are minimum credit score requirements to qualify for a specific mortgage loan program.
- For example, for a home buyer to qualify for a 3.5% down payment FHA loan, the home buyer needs a minimum of a 580 credit score
- To qualify for a conventional loan, the minimum credit score required is 620 credit score
Credit History Of Borrowers
However, just meeting the minimum credit score requirement does not mean borrowers automatically qualify for a mortgage loan.
- The mortgage lender also needs to review the credit report and see the overall payment history
- Lenders do not want to see any late payment history in the past 12 months
- Lenders also have a mandatory waiting period after bankruptcy and foreclosure guidelines
- Late payments after bankruptcy and foreclosure are frowned upon
- This is the case no matter how old the bankruptcy or foreclosure is
The mortgage loan originator will review credit scores and credit report prior to issuing a pre-qualification letter.
Income And Employment History
Income is probably the most important factor in determining the amount of mortgage loan home buyers qualify for.
- Self-employed or are 1099 wage earners, two-year tax returns will be required
- Needs to be reviewed by the mortgage loan originator prior to a pre-qualification letter being issued
- Self-employed and 1099 wage earner’s income qualification calculations are tricky
- Could be Factors Affect Pre-Approval
- Needs to be thoroughly reviewed
- Most self-employed and 1099 wage earners claim a lot of unreimbursed expenses on their tax returns
- This lowers their adjusted gross income and could be Factors Affect Pre-Approval
- Itemized deductions such as depreciation can be added back to income to boost the adjusted gross income and be positive Factors Affect Pre-Approval
- Part-time, bonus and overtime income cannot be used unless borrowers had it seasoned for two years
- Child support payments, disability, royalty income, social security income, and pension income can be used
In order for child support, alimony, disability, and royalty income to be used, the income needs to continue for the next three years.
Mandatory Requirement Factors Affect Pre-Approval
Two-year employment history is required.
- Borrowers do not have to have a continuous two years of employment history
- They do not have to be employed by the same employer for the past two years
- Gaps in employment are allowed
Borrowers who have been unemployed for six months or less case scenario:
- just got a new full-time job
- new wage on the new full-time job will be used for income calculation
- the only seasoning period to qualify for a mortgage loan is needed to provide 30 days of paycheck stub prior to closing
If borrowers have been unemployed for six or more months:
- need to be employed in a new full-time job for at least six months to qualify for a mortgage loan
- need verification of employment letter
- employment likely to continue for the next three years
Must Meet Debt To Income Ratios
Borrowers can have perfect credit and good income. But if they have too much monthly debt obligations, debt to income ratio may exceed the mandatory maximum DTI Requirements.
- The maximum debt to income ratio to qualify for an FHA loan is 46.9% front end and 56.9% DTI back end to get an approve/eligible per Automated Underwriting System Approval
- The maximum debt to income ratio to qualify for a conventional loan is 50% DTI
- Debt to income ratio is calculated by adding the sum of all of the monthly minimum debt payments, including new proposed housing payment, and dividing it by borrowers total monthly gross income
If the debt to income ratio exceeds the maximum allowed, there are options borrowers can take to lower the debt to income ratio so they meet the debt to income ratio guidelines.
Tips And Advice In Lowering Debt To Income Ratios
Some ways of lowering debt to income ratios and qualifying for a mortgage loan is by the following:
- paying down credit cards
- paying off certain credit items
- getting a non-occupant co-borrower
- FHA allows a home buyer to add a non-occupant co-borrower to qualify for an income
- But the non-occupant co-borrower needs to be a relative or family member
The non-occupant co-borrower goes on the mortgage note but not on title.
Down Payment And Closing Costs
Before a mortgage loan originator will issue a pre-qualification letter, the mortgage loan originator will want to see where the down payment and closing costs will come from.
- The loan officer will ask borrower how much money they have in the bank
They will also question asset information such as the following:
- investment account
- retirement account
- or any other liquid assets
- Down payment requirements vary depending on the mortgage loan program
- Closing costs vary from county to county
Third-Party Fees And Charges
They are third party charges such as the following:
- title charges
- recording fees
- appraisal fees
- attorneys fees
- other costs and fees associated with the home purchase and closing the mortgage loan
Gift Funds For Down Payment
Home Buyers who do not have own funds for the down payment, HUD allows a family member to gift 100% of the down payment:
- But the gift funds cannot be paid back and cannot be a loan
- A gift letter from both the home buyer and the gift donor needs to be signed and dated
Sellers Concessions And Lenders Credit
Most homebuyers do not have to worry about closing costs.
- A home buyer can get a sellers concession towards a buyer’s closing costs
- Most sellers have no problem with giving a home buyer a seller’s concession towards their closing costs
- The maximum sellers concession towards a buyers closing costs allowed for FHA and USDA loans is 6%
- The maximum sellers’ concession towards home buyers closing costs allowed for a conventional loan is 3% on owner occupant homes and 2% on investment homes
- VA allows up to 4% sellers concessions
Home Buyers who need to qualify for a mortgage with a direct lender with no overlays, please contact Gustan Cho Associates at 262-716-8151 or text us for faster response. We are available 7 days a week, evenings, weekends, and holidays.