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A home is the biggest purchase you’ve ever made – and if you are one of them 88% of homebuyers Anyone who finances their home purchase must go through the mortgage approval process.
Qualifying for a mortgage isn’t exactly difficult, but it can be a lengthy process and requires a lot of documentation. Because of the significant amount of money borrowed for a home, lenders must have strict requirements to ensure that you have sufficient income to make your monthly payments.
Here’s what you’ll need when applying for a mortgage.
What is the Mortgage Approval Process?
The mortgage approval process is one of the most important steps in purchasing your home. Unfortunately, it can also feel the most daunting. In general there are 6 steps for the process which can take from anywhere several weeks to several months.
Before you apply for a mortgage, make sure you have the necessary ones Employment history that lenders are looking for and that you can provide adequate proof of income.
Step 1: pre-approval
While this is not officially part of the mortgage approval process, most buyers get it pre-approved for a loan before going shopping. This gives them an idea of how much their lender is going to give them on a mortgage, and makes them a more competitive bidder, though make an offer for a house.
Step 2: application
Once you’ve found your home and accepted your offer, officially apply for your mortgage. At this point yours is Mortgage lender will do a thorough review of your creditworthiness, income, assets, debts, and all other financial factors.
Step 3: income verification
One of the most important steps in the mortgage process is the income verification process, which is where your lender uses the documents you provide to confirm that you have enough stable income to make your mortgage payments.
The best way to ensure that your mortgage chances are approved is to have all the required documents available and organized. Depending on your employment situation, these documents could include pay slips, W-2 forms, tax returns, income statements, and bank statements.
Step 4: evaluation
Before a lender can approve a mortgage, A house evaluation must take place. The lender determines the maximum loan amount based on the rating.
Step 5: title search and insurance
Before a mortgage can be closed, the lender needs to do a title search and Property insurance by a title company. This step ensures that no other person or company has any legal title to the house.
Step 6: decision
Ultimately, the lender will make a decision about your loan. Generally, the lender will either approve or deny your application. However, they can also suspend your application if they cannot review all of your financial information.
“There are three key components to mortgage approval,” said Melissa Cohn, a senior mortgage lender at William Raveis Mortgage. “One is your credit. With good credit, have you demonstrated the ability to borrow and repay on time? Second, do you have enough cash in the bank to close the deal? Do you have enough money for the down payment, closing costs and reserves? Lenders today usually want reserves of a certain number of months as rainy day funds. Finally, do you have the income to qualify? “
How Much Income Do You Need to Buy a Home?
Your income is one of the most important factors that lenders consider when applying for a mortgage. But there is no minimum income that you need to buy a home. Instead, lenders look at your debt to income ratio, which is the percentage of your gross monthly income that is used on debt obligations.
“What the lender would check for pre-approval is what we call DTI, which is the debt-to-income ratio,” said Polina Solis, a Texas broker. “There are certain loan packages, such as B. Conventional or FHA loan packages that have different DTI requirements. In general, you don’t want your monthly home payment to be more than 30% of your gross income. “
There are two ratios that lenders will look at. Your front-end DTI is your future monthly housing costs compared to your gross monthly income. Your back-end DTI includes all of your debt payments, including your housing allowance payments, compared to your gross monthly income.
An acceptable DTI for buying a home will depend on other factors, including your creditworthiness. However, according to Solis, lenders generally require that borrowers have a DTI of no more than 45%. In some cases, they may be willing to allow up to 50% if the borrower has exceptional credit and extra cash.
While lenders may allow up to 45% or 50% DTI in some situations, a well-known rule of thumb is that 28/36 ruleThis means that your front-end rate should not be more than 28% and your back-end rate should not be more than 36%.
Proof of income for a mortgage loan
When you apply for your mortgage, your lender will need several documents to prove that your income is what you stated. For W-2 employees working in a traditional employment situation, this step is quite easy. You’ll need to provide your most recent pay slips, as well as two year tax returns and W-2 forms.
Although you have two years of tax filing, lenders don’t require you to be in the same job for two full years. Instead, they need two years of steady income, preferably within the same range.
Things get a little more complicated when you work in a job where your income depends on bonuses or commissions. According to Cohn, you typically need at least two years of bonus or commission income for a lender to take this into account. However, if other factors offset this, it could only take a year.
If your variable income from last year was higher than last year, you would take an average of the two numbers. If last year’s income was lower they would only use the lower number.
What if you are self-employed?
The requirements for qualifying for a mortgage are even stricter if you are self-employed. Unlike W-2 employees, most lenders require a self-employed person to have at least two years of income in their business.
“It doesn’t have to be difficult as long as you have all the necessary documents,” said Jeff Shipwash, real estate investor and owner of Shipwash Properties. “The most common situation is an individual member or a partnership or persons with a DBA as sole proprietorships. You have to submit a two-year tax return. Tax returns can be unique depending on your situation. However, it is usually best to have audited degrees from a CPA to complement them. “
In addition to filing your tax returns, lenders may require you to review income statements or bank statements for the current year to ensure that your income situation has not changed.
It is important to note that when lenders look at your tax returns when you are self-employed, they are really looking at Adjusted Gross Income (AGI) on your Schedule C. Your AGI is your total business income minus any expenses and deductions. While you may find that your gross income is sufficient to qualify for a mortgage, it is really your AGI that matters.
“The best advice my accountant has given me, which I believe applies to this situation, is, ‘Always think like an accountant and you’ll be fine,” Shipwash said. that an auditor can review it in less than 5 minutes. If you can keep and manage your records this efficiently, it will make fundraising a lot easier. “
Can you get cash for a down payment from a friend or relative?
Lenders generally allow home buyers to receive gift money from loved ones in exchange for their down payment. Under the requirements of Fannie Mae and Freddie Mac, these gifts can only come from a family member who is related by blood, marriage, adoption, or legal guardianship. The gift can also come from a fiancé or a domestic partner.
If you receive your deposit as a gift, you will also need to provide a gift letter written by the donor. The gift letter should include the dollar amount of the gift, the date, and confirmation that the gift is not a loan and no repayment is expected.
The bottom line
When applying for a mortgage, lenders are keen to make sure that you can make your mortgage payments every month. As a result, they have stringent requirements on a borrower’s employment history and proof of income. The process can feel overwhelming, especially when First time buyer.
The best course of action is to surround yourself with professionals who can guide you through the process. Find a trusted real estate agent and mortgage lender so you can ask questions and feel safe.