To get a clearer view of the home loan process, it's helpful to know some of the factors that will be considered when your mortgage application is reviewed.
When you apply for a mortgage, whether you're purchasing or refinancing, the mortgage loan officer will forward your application and the supporting documentation to an underwriter. It's the underwriter's responsibility to review your loan scenario and the supporting documentation to ensure that it meets the loan program guidelines to determine whether or not you qualify for the loan.
The underwriter looks at your application to see if it meets these basic criteria:
•Your ability to repay the loan. This requirement reviews your income to see if it is enough to cover the new mortgage payment and all your other monthly expenses. To figure this out, lenders use your debt-to-income ratio. To calculate yours, add up your projected monthly home payment and all of your other recurring debt. Do not include expenses like your electric bill or phone bill. Divide that total number by your monthly pre-tax income to find your ratio. Most lenders want your debt-to-income ratio to be 36% or less, but the ratio that works best for you is the one that you can comfortably afford. If you're self-employed, tell your lender so they can help guide you through any specific questions about your employment or income.
•Your likelihood to repay the loan. Your payment history and credit score are indicators to lenders of your likelihood to make payments in the future.
•The home value - The underwriter carefully looks at the home value, based on a professional appraisal ordered by your lender, of the property you are purchasing to verify that it meets or exceeds the purchase price or outstanding mortgage balance. This will also help them ensure the loan-to-value (LTV) ratio fits within the loan program guidelines. To qualify for a conventional loan, most lenders require you to have a loan-to-value ratio of no more than 95%. The higher your home’s value and the less you owe on it, the lower your LTV ratio.
•The source of funds for your down payment. - The underwriter will verify your down payment funds. If you have a down payment of less than 20%, you will typically be required to carry private mortgage insurance (PMI) at an extra cost. The underwriter will review your documentation to estimate whether you have enough money to cover closing costs. You may also be required to have set aside two monthly mortgage payments as reserves. Lenders typically require reserves to cover your mortgage payment in case of emergencies or unforeseen events. If you are refinancing and don’t exceed the lender's maximum loan-to-value limit, you may be able to finance some or all of the closing costs instead of paying them out of pocket.
As you move forward, keep in mind that your income, debt, credit history, down payment and savings, the home's value and your loan program’s guidelines will all play a role in whether your loan application is approved.