Factors that Influence Pre-Approval
If you want to increase your chances of getting a mortgage pre-approval, you need to understand what criteria lenders look at when evaluating your financial background. They are as follows:
DTI (Depth to Inflation) Ratio
Your DTI ratio is a calculation that compares all of your monthly debts to your monthly income. Mortgage lenders figure out how much of your gross monthly income you make each month by adding your debts, such as your auto loans, school loans, revolving charge accounts, and other lines of credit, and then subtracting your new mortgage payment from that.
Borrowers should keep their DTI ratio at (or below) 43 percent of their gross monthly income to qualify for a mortgage, depending on the loan type.3. The higher your DTI ratio, the greater the risk you pose to lenders; you may find it difficult to repay your loan while still making debt payments.
With a lower DTI ratio, you may be eligible for a reduced interest rate. Pay off as much debt as you can before purchasing a home. You will not only lower your DTI ratio, but you will also demonstrate to lenders that you can responsibly handle debt and pay your expenses on time.
Loan to Value (LTV) Ratio
How much money you can borrow divided by the value of your home is another important way lenders look at you for a mortgage. A property appraisal determines the property’s value, which may be lower or greater than the seller’s asking price. Your down payment is factored into the LTV ratio formula.
A down payment is a lump sum payment that you make to the seller at the closing table in cash. The smaller your loan amount—and, as a result, the lower your LTV ratio—the larger your down payment. If your down payment is less than 20%, you may be required to pay for private mortgage insurance (PMI). It’s a form of insurance that protects lenders in the event that you don’t pay your mortgage. To reduce your LTV ratio, either put more money down or buy a less costly home.
Credit History and Score
Lenders will obtain your credit reports from Equifax, Experian, and TransUnion, the three major credit reporting bureaus. They’ll look at your payment history to see if you pay your bills on time, as well as how many and what kind of credit lines you have open and how long you’ve had those accounts.
Lenders look at how much of your available credit you are actively using, also known as credit utilization, in addition to your payment history. Maintaining a credit utilization rate of 30% (or below) helps to improve your credit score.5. It also demonstrates to lenders that you are reliable and consistent in paying your bills and managing your debt intelligently. All of these things go into your FICO score, which is a credit score model used by many lenders, including mortgage lenders.
You could have problems getting a mortgage pre-approval if you haven’t opened any credit cards or standard lines of credit, such as a car loan or a school loan. Opening a starter credit card with a low credit line limit and paying it off each month will help you build credit.Your payment activity could take up to six months to show up on your credit score. It’s critical to be patient while you work to improve your credit score.
A FICO score of 620 or above is required by most lenders for a conventional loan, and some even require it for a Federal Housing Administration (FHA) loan. Customers who have a credit score of 760 or more are often the ones who get the best rates.
FHA criteria allow eligible borrowers with credit scores of 580 or higher to put down as little as 3.5 percent.6. Those with lower credit ratings must put down a bigger amount. Lenders often work with people who have bad or poor credit and give them advice on how to improve their score.
Work Experience and Earnings
Lenders go to considerable pains to ensure that you make a steady salary and have a stable job when you apply for a mortgage. That’s why lenders ask for two years’ worth of W-2 tax forms, as well as your employer’s contact information. Lenders want to know that you’ll be able to handle the additional financial strain of a new mortgage.
You’ll also be asked for your salary details, which a lender will use to verify that you earn enough money to afford a mortgage payment and other monthly housing costs. You’ll also need to present 60 days of bank statements (and potentially more if you’re self-employed) to prove that you have enough cash on hand for a down payment and closing costs.