Buying a home is typically the biggest financial transaction in one’s life and the home loan approval process can be a stressful experience, but it doesn’t have to be. Like most financial transactions, if you go into the process knowing exactly what will be required, the experience can actually be pretty painless. The objective of this article is to cover the steps in the process starting with the submission of your application to a lender.
Once you’ve submitted your application, assuming your lender has already requested your credit report as part of the pre-approval process, the lender will issue you disclosures that detail the terms of your transaction like loan amount, interest rate and closing costs. The lender will then order an appraisal of your property to obtain an objective opinion of the property’s market value, taking into account recent comparable sales and an onsite inspection of the subject property. It can take a few weeks for the lender to receive the appraiser’s report, but meanwhile, they will begin reviewing your application and requesting supporting documentation from you.
At a minimum, you should expect to provide two recent paystubs, your two most recent W2s, two months worth of bank statements, your most recent tax return and copies of any existing mortgage statements and property tax bills. If you own a business or work as a contractor, you will likely be asked to provide business tax returns for the two most recent years, 1099s and other documents such as K1s.
The lender evaluates these documents to assure that you have both the assets to afford your down payment, the ongoing income to support the mortgage principal, interest, taxes and insurance (PITI) along with your other existing debts and enough money left over after your down payment, referred to as “reserves”, in the event you unexpectedly experience a drop in your current income and need to rely on these funds to make your payments.
It’s helpful to segment your application into the key areas a lender will examine:
Your lender extracts two key pieces of information from your credit report. The first is your credit or FICO score. This is a score that ranges between 300–850 that summarizes your debt repayment history. A lender will usually get your score from the three major credit bureaus and utilize the middle score to determine eligibility. For example, if your credit scores are 770, 780 and 790, the lender will base their credit decision on a credit score of 780. Borrowers with scores above 700 are generally eligible for the best interest rates.
Your lender will also look at your monthly debts or “tradelines” and compare these to your monthly debts to help determine how much money you will have each month to service your new mortgage and any existing debt.