Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.
Following are the main parts of a mortgage approval:
Debt-To-Income (DTI) Ratio –
A borrower’s DTI Ratio is a measurement of their income to monthly credit and housing liabilities.
The lower the DTI ratio for a borrower (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.
Loan-to-Value (LTV) –
Loan-to-Value, or LTV, is used by lenders when comparing the difference between the loan amount and a property’s value.
Certain loan programs require a borrower to invest a larger down payment, while some government loan programs were created to help buyers secure financing on a home with 96.5% to 100% LTV Ratios.
Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a borrower. The higher the credit score the better your chances of getting approved for a mortgage.
While lenders like to see multiple open lines of credit with a minimum of 24 months reporting history, some loan programs allow borrowers to use alternative forms of credit to qualify for a loan.
Property Types –
The type of property, and how you plan on occupying the residence, plays a major role in getting mortgage financing.
Due to some HOA restrictions, government lending mortgage insurance requirements and appraisal policies, it is important that your real estate agent understands the exact details and restrictions of your pre-approval letter before placing any offers on properties.
Mortgage Programs –
Whether you’re looking for 100% financing, low down payment options or want to roll the costs of upgrades into a rehab loan, each mortgage program has its own qualifying guidelines.
There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.
A mortgage professional will consider your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.