Understanding the mortgage Pre-Approval process

DANIEL ZEMBIAK
DANIEL ZEMBIAK
Published on February 11, 2020

Many consumers believe that when they are “Pre-Approved” for a mortgage loan, the loan is guaranteed and nothing can go wrong. Unfortunately, that is simply not correct.

In order to understand everything that can happen from the time a lender issues a “Pre-Approval to the time of closing, one must understand exactly what goes into a mortgage Pre-Approval. To go through this process, we will start with the basic parts to getting “pre-approved”.

No matter who the lender is, it takes 4 things for a borrower to get approved for a mortgage loan:

  1. Credit
  2. Income
  3. Assets
  4. Approval through Desktop Underwriter

Credit

This determines if a person can even be given a loan and is the easiest starting point used in the mortgage industry in seeing if someone qualifies for a loan. Credit is broken down into two elements – credit score and credit history.

When it comes to the credit score requirement, different programs allow for different credit scores in order to qualify for a mortgage loan. There are 3 credit bureaus in the United States (Experian, Equifax, and TransUnion). All 3 provide different scores, and the median score of the three is the one that is used to determine eligibility.

Currently, these are the minimum credit score requirements:

  1. Conventional – 620
  2. FHA – 500
  3. USDA – 580
  4. VA – 500

When it comes to the credit history requirement, different programs allow for different types of credit history. This is the part of mortgage lending which becomes extremely difficult to predict,

It is also the part of getting pre-approved for a mortgage loan which has a lot of gray area, and different underwriters for the same lender could arrive at totally different decisions.

Income

Income determines the maximum amount of a loan a borrower may qualify for. Every loan program has a qualifying debt-to-income ratio which is required to qualify for a mortgage loan.

For a conventional loan, the mortgage payment should not be more than 28% of the borrowers gross monthly income. And the total monthly debt + mortgage payment should not exceed 36% of the borrowers gross monly income.

For FHA, USDA, AND VA loans, the allowable the debt-to-income ratios are much more lenient.

Assets

All loans require a borrower to have money for some part of the transaction, whether it is closing costs, appraisal and inspection fees, or the down payment.

Some of these charges may be paid with cash, a credit card, or someone else. However, when it comes to the down payment, that money must be verified as coming from the borrower.

Approval through Desktop Underwriter

Desktop Underwriter is a computer software program created by Fannie Mae to preliminarily “underwrite” a transaction and make a decision (approve or deny) based on reading the credit report and analyzing the debt ratio and assets.

Every single borrower who goes to qualify for a mortgage loan today (if the loan is being sold to Fannie Mae, FHA, or VA) must be run through this computer program.

Within one minute of importing all of the borrower’s information, the computer will make a decision – Approve or Decline.

If a decision is “Approved”, then the borrower is only about 60% of the way to getting the loan. This is because there are some things the computer cannot read and require an actual underwriter to review.

Getting a strong Pre-Approval

A proper Pre-Approval is one in which the loan officer collects the borrower’s financial information ( loan application, tax returns, W2’s, bank statements, recent pay stubs, cancelled rent checks, etc), and pulls a credit report from all 3 bureaus, reviews all asset documents, and runs the file through the Desktop Underwriter program.

By understanding the documents and the Pre-Approval process, there is less of a chance the borrower will be declined for the loan, and the transaction will go smoother, which is better for the consumer and everyone involved.

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