MORTGAGE APPROVAL PROCESS

Before you begin looking for a home or a mortgage, it's important to know what is involved in the mortgage approval process. This knowledge will help you be prepared, so that you can get the best deal on a mortgage.

Lenders need to have something tangible to back their loans to borrowers, just in case the borrowers should default on their mortgages. In other words, the lenders want collateral.

What's considered collateral? First, your down payment. Most lenders will require you to make a down payment on the home you wish to buy. The down payment can range from 10% to 20% of the price of the home. FHA loans, veterans loans, and RHS loans require smaller down payments or no down payments. However, it's to your advantage to have as much of a down payment as you can reasonably afford. Why? Because the more you put down, the less interest you'll pay over the term of your mortgage.

The other collateral your lender will look at is the home itself. The lender will order an appraisal of the home, which will show how much the home is worth relative to other homes in the area. Typically, a lender will not do a mortgage for more than 95% of the appraised value of the home. The subprime mortgage crisis in 2007 has left many lenders cautious, though, so they may not be inclined to lend as much as 95% of the home's value.

Lenders also need to know that you can make your mortgage payments in full and on time. So, they'll look at your income, savings, and your debt. Lenders will usually limit the full amount of your monthly mortgage payment, including taxes and insurance, to 25% to 28% of your monthly pre-tax income. The lenders will also look at your other debts, such as car loans, student loans, other mortgage debt...in other words, any ongoing financial obligations that you have. Typically, lenders prefer that all of your debt, including your mortgage payment, not consume more than 33% to 36% of your monthly pre-tax income. FHA loans have higher debt percentage of 41% of your monthly pre-tax income.

The other factor in the mortgage approval process is your credit history. Your mortgage credit grade will determine what kind of deal you will get on your mortgage, or even if you can get a mortgage at all. The lender will look at your credit score, any history of defaults or foreclosures, and any history of late payments on all types of credit accounts.

It's to your advantage to look at your credit history before beginning the mortgage approval process. You can request a copy of your credit report from any of the three credit reporting agencies--Equifax, Experian or TransUnion. Look at your credit report carefully for any errors. If you find errors, make every effort to have them removed from your report before you begin the mortgage approval process.

If your lender turns you down for a mortgage, the lender must explain why. A denial isn't the end of the road, though. Ask your lender if there are any steps you can take that will result in you being approved for a mortgage.

By researching the factors above that affect the mortgage approval process, you stand a better chance of getting the best deal possible on a mortgage, and having the process move smoothly.