Ultimately, lenders decide whether to approve a potential borrower based on four key factors:<\/p>\n\n\n\n
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- Income<\/strong><\/li>\n\n\n\n
- Assets<\/strong><\/li>\n\n\n\n
- Debts<\/strong><\/li>\n\n\n\n
- Credit History<\/strong><\/li>\n<\/ul>\n\n\n\n
How exactly do these factors determine whether or not you’ll be pre-approved for a mortgage? And what documentation will you need to provide to get pre-approved?<\/p>\n\n\n\n
Read on.
<\/p>\n\n\n\nVerifiable Income<\/strong><\/h2>\n\n\n
\n![\"\"](\"https:\/\/morty-content-production.s3.amazonaws.com\/uploads\/2017\/12\/shutterstock_367090130-1024x683.jpg\")
<\/figure><\/div>\n\n\nWhen evaluating potential borrowers, lenders\u2019 biggest concerns are pretty straightforward. Can this person afford to borrow the money for this home?<\/em> Can we trust this person to pay us back?<\/em><\/p>\n\n\n\n
As you might guess, How much money does this person earn?<\/em> is pretty high on a lender\u2019s list of concerns when trying to determine whether an applicant is a good bet for a mortgage. So to pre-qualify for a mortgage, you\u2019ll need to let lenders know just how much money you\u2019re bringing home every month.<\/p>\n\n\n\n
Interestingly, how much<\/em> you make is not the only income-related question lenders are curious about.<\/p>\n\n\n\n
Mortgage lenders want to know that you are making money. But they also strongly prefer to see that you\u2019ve been consistently employed with the same company or in the same industry for a few years. Leaving your job or changing careers mid-way through your mortgage application can potentially jeopardize your home financing. Quitting your actuarial job to become a trapeze instructor is going to make the mortgage underwriters very nervous. Now more than ever, being able to show a high likelihood of continuous and consistent income during the approval process is key. <\/p>\n\n\n\n
Income documentation required for mortgage pre-approval:<\/strong> <\/h4>\n\n\n\n
At a minimum, you\u2019ll need to provide a copy of last year\u2019s earned income. If you\u2019re a salaried or hourly-wage-earning employee, you\u2019ll need to have your most recent W2s and in many cases the last two years (if you\u2019ve switched employers in that timeframe, then you should expect to provide 2 years). You may not need to hand over your most recent pay stubs for pre-approval, but you\u2019ll definitely need them for your full mortgage application, so have copies of any recent pay stubs on standby.<\/p>\n\n\n\n
If you own a business or are self-employed, get ready for a pretty thorough review of your business finances. It\u2019s not unusual for lenders to want the current year\u2019s profit-and-loss statements and at least two years of the business\u2019s tax returns. If you have been self-employed with the same business for the last 5 years, then you will start to see the reduction in documentation requirements. <\/p>\n\n\n\n
And don\u2019t forget about documenting income from social security, disability, child support, or your side hustle walking dogs. Basically, if the income shows up in your bank account at any point and will be used for qualification, you\u2019ll need to account for it before the mortgage process is over.
<\/p>\n\n\n\nVerifiable Assets<\/strong><\/h2>\n\n\n
\n![\"\"](\"https:\/\/morty-content-production.s3.amazonaws.com\/uploads\/2017\/12\/shutterstock_594650312-1-1024x683.jpg\")
<\/figure><\/div>\n\n\nContrary to the unsolicited financial advice that one uncle of yours likes to offer up at family gatherings, you do not need to have 20% of the cost of your future home ready to use as a down payment.<\/p>\n\n\n\n
But even if your home buying future includes a low down payment, you will still need to have some funds in the bank to buy a home. There are closing costs, moving expenses, and usually some one-time repairs or improvements you\u2019ll want to make to your new home right as you move in. Some lenders will want to see that borrowers have several months\u2019 worth of future mortgage payments in reserve cash. You know, just in case something happens. If you\u2019re using retirement funds or funds in the stock\/bond market, you must also be prepared to liquidate these funds for review prior to final approval.<\/p>\n\n\n\n
Asset documents required for mortgage pre-approval:<\/strong> <\/h4>\n\n\n\n
Usually, you\u2019ll need to provide the most recent two months\u2019 statements or most recent quarterly statement for your checking and savings accounts. (If you are using Morty for your pre-approval, you won\u2019t need to print and scan pages of old bank statements. We\u2019ll help you do that part online, no fussy printing and scanning required.)<\/p>\n\n\n\n
It is also common to receive a gift from a relative to help cover some of the closing costs or down payment. The lender will require the donor to fill out and sign a gift letter which confirms the amount of the gift and the accounts being used for the transfer. While the letter is usually not required for pre-approval, it will be required prior to closing. <\/p>\n\n\n\n
You will also need your most recent statements from any investment or retirement accounts you currently have\u2014especially if you\u2019ll be drawing from investments for, say, your down payment.<\/p>\n\n\n\n
For a mortgage pre-approval, you will probably only need to list your property assets.<\/p>\n\n\n\n
But have the deeds and information about any other property you own on standby. You\u2019ll need to include that documentation with your complete mortgage application.
<\/p>\n\n\n\nManageable Debts<\/strong><\/h2>\n\n\n
\n![\"\"](\"https:\/\/morty-content-production.s3.amazonaws.com\/uploads\/2018\/02\/StockSnap_1FN7NK2P5B-1024x680.jpg\")
<\/figure><\/div>\n\n\nYou do not need to be 100% debt-free before you take on the joys and responsibilities of homeownership. What you will need is a current debt-load that, when combined with your soon-to-be mortgage payment, still leaves you enough money to eat and pay utility bills and occasionally get new shoes when the old ones wear out.<\/p>\n\n\n\n
Mortgage lenders will calculate your debt-to-income ratio when determining whether or not you qualify for a mortgage. Generally, lenders are hoping to see that even with the additional expense of a mortgage to pay, you won\u2019t be spending more than 43% of your pre-tax income repaying debts. Depending on other factors in your application (for example, credit score and assets) and the mortgage programs you are best suited for, some lenders will allow a debt-to-income ratio of up to 50%, but this varies on a case-by-case basis and the 43% cut-off gives access to the most widespread set of lending terms & programs.<\/p>\n\n\n\n
If you currently own a home and have a mortgage but plan to sell the home before purchasing the new one, you will want to make sure this is properly captured on your pre-approval application so the lender knows not to exclude this when calculating your debt-to-income ratio.<\/p>\n\n\n\n
(It\u2019s also worth noting that 43% of your pre-tax income is a pretty sizable level of debt. Even if lenders allow it, it\u2019s almost definitely in your financial interests to try to keep your personal debt-to-income ratio lower than that.)<\/p>\n\n\n\n
Debt documentation required for mortgage pre-approval:<\/strong> <\/h4>\n\n\n\n
Lenders will be able to glean most of your debt obligations from your credit report. If you\u2019ve got other debts that may not show up on your credit report\u2014perhaps you pay child support or alimony, or you have an informal family debt that you\u2019re repaying\u2014be sure to include these or discuss them with your mortgage advisor when figuring out how much home you can qualify for.
<\/p>\n\n\n\nA Good Credit Score<\/strong><\/h2>\n\n\n
\n![\"\"](\"https:\/\/morty-content-production.s3.amazonaws.com\/uploads\/2017\/12\/shutterstock_642164197-1024x683.jpg\")
<\/figure><\/div>\n\n\nAre you the kind of person who has been tracking your credit score for ages? Then you are in luck. Buying a home is one of those moments in your life where your credit score really does matter.<\/p>\n\n\n\n
If you haven\u2019t been obsessively tracking and tweaking your creditworthiness for your entire adult life, don\u2019t fret. Your credit score does not need to be stratospherically high to be qualified for a mortgage. Almost all lenders will work with borrowers whose scores are in at least the mid-600s.<\/p>\n\n\n\n
Over the past few years, conventional mortgages (those backed by Fannie Mae and Freddie Mac) have required a minimum credit score of 620. Credit score requirements for FHA mortgage are even lower. Just how low depends on how much the borrower is able to use for a down payment. With an FHA loan, a would-be homeowner can have a score as low as 580 if they are able to put 3.5% down, and as low as 500 if they can put down at least 10%.<\/p>\n\n\n\n
That being said, it\u2019s important to note that lenders have halted many Non-Agency programs as well as adjusted and tightened the lending requirements across the more common Conventional and Government mortgage programs (FHA, VA) as COVID-19 impacts the economy. We’ve seen a wide variance from lender to lender, many increasing minimum FICO scores or minimum down payment percentages.<\/p>\n\n\n\n
Credit documentation required for pre-approval:<\/strong><\/h4>\n\n\n\n
As you go through the pre-approval process, the lender will require you to do a tri-merge credit pull. This report pulls credit from the three major credit bureaus: Experian, Transunion and Equifax. For this reason, it is considered a hard inquiry (whereas a soft inquiry only pulls credit history and a score from one of the bureaus). Lenders are required to use the middle credit score from the three bureaus to determine what loan types and products to offer you. If you have a co-borrower, the lender will use the lower of the two middle scores.<\/p>\n\n\n\n
You won\u2019t have to request and print credit reports for yourself, though. During the application or profile-building process, you\u2019ll just need to give your permission to have credit reports generated for you and your co-borrower.
<\/p>\n\n\n\n - Assets<\/strong><\/li>\n\n\n\n