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Qualifying for a Mortgage

PreApproval

A Preapproval is more than a best estimate by a loan officer after a brief period of conversation and little gathering of information. A Preapproval involves an in depth examination of your credit history, financial situation, and sometimes the property itself. The lender/broker will independently verify the facts you supplied on your loan application. If you are fully disclosing income and assets they will collect and examine your W-2's (tax returns if self-employed), pay stubs, credit report, and your bank and other asset statements. If your loan is being run through an automated underwriting system the documentation requested by the automated approval is what you will be asked to provide to the Mortgage Specialist.

The application is usually taken over the phone and when the Mortgage Specialist examines your information and where you discuss what you are looking for in a loan then the Mortgage Specialist will go over your options with you, including down payment, types of loans you are eligible for as well as the rate and term. It is at this time when we determine the best loan product you are eligible for that best suits your mortgage needs.

What the Underwriters look at:

These are very simplified guidelines of what a typical mortgage underwriter will consider when evaluating your mortgage application for a conventional (Fannie Mae) loan.

1. Debt to income - The ratio of your total debt divided by your total income, the written limit is 36% although 40%-45% is now the unwritten standard, with the advent of automated underwriting this ratio for conventional (Fannie/Freddie) mortgages is much higher now. This number is figured on gross income. FHA is still relatively strict with their total debt to income ratio at 43%.
2. Income and job stability - 2 years at same job or in same industry preferred.
3. Assets -Cash reserves are usually required to be seasoned (in your account for at least 2 months) and enough to cover your down payment, closing costs, and the first 2 months of mortgage payments.
4. Loan to Value - (LTV in mortgage language) is the amount you are borrowing divided by the appraised value of the house.
5. Property appraisal - Underwriters will go over the appraisal with a microscope and may deem either the appraisal or the subject property unsuitable to lend against.

Automated Underwriting

In the past 3-5 years there has been a major move in the mortgage industry away from human underwriters and to a more subjective way of measuring a borrower. This is called automated underwriting. You have a computer program that makes a decision based on the same basic criteria as above. Your application information is entered into a computer and the software makes a decision as to whether or not to approve your loan. The main difference is that automated underwriting will often use compensating factors such as a high credit score or low loan to value to approve the loan despite shortcomings in other areas of the application. I have seen loans with excellent credit that were approved with a 64% debt to income ratio when 40%-45% used to be the industry norm.

There is usually much less documentation required when a loan is approved through an automated underwriting system and loans sometimes closes in several days now instead of several weeks. The human underwriter's role is to verifying all the documentation requested by the automated system and evaluating the appraisal. The bottom line is that due to this automated underwriting system, in many cases we can have you preapproved in minutes. Taking your loan from application to closing is a much more efficient and faster process than ever before.