If you’re new to the mortgage loan process, or if it’s been a while, you may be experiencing a variety of emotions if you’re thinking about getting a new home. Before getting too far into the process, one of the first steps in buying a home is going through the mortgage pre-approval process. Learning about the most important factors and knowing what you need so you can speed up the approval process can make a big difference in how ‘easy’ it is for you.
You’ll want to know things like how much home you can afford, how much money do you need to have available to make a mortgage happen, and what does the entire process looks like from start to finish among a multitude of other factors. When it comes to mortgage pre-approvals, our in-house mortgage experts like to focus on three key elements that make all the difference in your pre-approval for the home of your dreams!
Those three key elements are Credit, Down Payment, and Income.
CREDIT
When applying for a mortgage you need to consider not only your credit score, but you’re your overall credit profile. Yes, that 3-digit number is important, but additionally, what does the rest of your credit report look like. Do you have a mix of credit, or multiple different loans or tradelines? Are you making your payments in a timely manner or have you missed some here and there? Mortgage lenders will look at the most recent aspects of your credit profile and generally go back up to two years’ time.
Of course, different lenders have different standards when looking at your credit, but generally speaking and specific to CSE, the minimum credit score we like to see for a mortgage pre-approval is 620 for Conventional or FHA loans. But, remember it’s more than the score! It’s good to have a healthy overall credit profile, versus a thin credit profile (meaning you don’t have a great mix of credit, and maybe only 1 tradeline, like a credit card). It’s also a good idea to make sure you’ve gone over your credit report, verifying that there are no issues or errors that need to be corrected prior to applying for a mortgage. Lenders typically like to see 12+ months of good payment history, and at least three trade lines (loans or credit cards), this is ideal for an easier pre-approval.
It's also worth knowing, if you utilize tools such as credit monitoring tools or websites, for example, Credit Karma, that’s they’re not necessarily providing you with a precise and accurate credit score. When credit is pulled for a mortgage pre-approval data from all three credit bureaus Experian, Equifax, and Transunion) are all pulled which gives us an exact score. This may differ from what you’re looking at on a credit monitoring site. Be prepared for a variation in your score which will affect your pre-approval.
To learn a little more about Credit and the mortgage pre-approval process, watch our video here: https://www.youtube.com/watch?v=fQNwFEBprcs
DOWN PAYMENT
A down payment is the required percentage of your home's purchase price that you pay upfront when you close your home loan – depending on the loan type. We get quite a few questions specifically about down payment when members apply for a mortgage. A constant question or misconception is how much down payment is required - - do we need to have 20% down? The answer is, not necessarily! Depending on the type of loan you’re applying for, your credit score, income, and other factors, down payments can sometimes be as little as 3-5% of the home you’re hoping to purchase.
Remember, a down payment isn’t the only money you’ll need. You may also need funds to cover some of the ‘prepaid’ costs (taxes, years’ worth of insurance, etc.), along with the closing costs (fees done for services in the loan process such as the appraisals, title fees, etc.).
The most acceptable down payment we like to see is what we like to call ‘seasoned money’, or money that you’ve had for a while or have accumulated and saved over time. We need to know where that money comes from because not all forms of down payment are acceptable. If we see a large deposit, we are required to verify where the money has come from. Documentation is key unless it’s a large sum of saved money over time. It’s not that you can’t have a large deposit of money to use for a down payment, we just need to verify the source it came from and that it is valid.
Some unacceptable forms of a down payment may include; a large cash deposit, money from a friend, or money from the seller.
If you don’t have money in the bank that has been saved over time, other sources that are viable include a bonus from work, tax refund, or gift (not a loan that needs to be paid back) from an eligible family member such as a parent, grandparent, son or daughter who will be required to sign documentation and be prepared because they’ll likely need to show their financial statements as well.
To learn a little more about Down Payment and the mortgage pre-approval process, watch our video here: https://www.youtube.com/watch?v=lba8UjO96U8
INCOME
Income is that weekly, bi-weekly, or monthly take-home pay that will support making your monthly payments to your loan once approved, allowing you to stay in the house. Income stability and consistency, along with documentation of this, are key in the mortgage pre-approval process. By looking at an income, along with debts owed, a lender can calculate what percentage can be loaned out – aka, how much of a home you’ll be able to afford.
There are many questions that arise on the topic of income. What if I am self-employed? What if I just changed jobs?
Self-employed homebuyers can be a bit more difficult to pre-approve, because it can be a little harder to show income, and you will need a minimum of two years’ worth of W2s. Although it can be tricky, our mortgage experts know what questions to ask and what documentation is needed to get the loan approved.
As far as a change in jobs, if it happens right before you apply for a mortgage, or even during the process, again, this may throw a bit of a hill in your path to approval. However, it’s still possible for pre-approval as long as the documentation is there, the income accounted for, and it makes sense.
There are some incomes that are unacceptable, along with additional incomes that are. To learn a little more about Income and what is/isn’t acceptable and the mortgage pre-approval process, watch our video here: https://www.youtube.com/watch?v=rA4JBlOhbGA&feature=youtu.be
We hope digging into this topic helps answer some of your questions when it comes to the mortgage pre-approval process. There’s a lot that goes into such a big purchase and our mortgage loan experts are ready to help you find your dream home! If you’re ready to start your journey, learn more at our website where you can contact us about getting preapproved!
All loans are subject to credit approval.
CSE NMLS#538074
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