Mortgage Approval Process

Whether you're a First-Time Home Buyer or seasoned investor in the Bay Area, the mortgage approval process can be a a bit inundating without a proper road map and good team in your corner.

Updated program guidelines, mortgage rate questions and down payment requirements are a few of the components you'll need to be aware of when getting mortgage financing for a purchase or refinance.

While this site is full of useful information, industry terms and calculators that will help you research the mortgage approval process in detail, this particular page was designed to give you an outline of the important components involved in getting qualified for a new mortgage.

Mortgage Approval Components:

Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.

Following are the main parts of a mortgage approval:

Debt-To-Income (DTI) Ratio -

A borrower's DTI Ratio is a measurement of their income to monthly credit and housing liabilities.

The lower the DTI ratio for a borrower (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Loan-to-Value (LTV) -

Loan-to-Value, or LTV, is used by lenders when comparing the difference between the outstanding loan amount and a property's value.

Certain loan programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing on a Bay Area home with 96.5% to 100% LTV Ratios.

EX: A Conventional Loan requires the borrower to purchase mortgage insurance when LTV is greater than 80%. To avoid paying mortgage insurance, the borrower would have to put 20% down on the purchase of a new property. On a $100,000 purchase price, 20% down would be equal to $20,000.

Credit -

Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a Bay Area borrower.

While lenders like to see multiple open lines of credit with a minimum of 24 months reporting history, some loan programs allow borrowers to use alternative forms of credit to qualify for a loan.

Property Types -

The type of property, and how you plan on occupying the residence, plays a major role in getting mortgage financing.

Due to some HOA restrictions, government lending mortgage insurance requirements and appraisal policies, it is important that your Bay Area real estate agent understands the exact details and restrictions of your pre-approval letter before placing any offers on properties.

Mortgage Programs -

Whether you're looking for 100% financing, low down payment options or want to roll the costs of upgrades into a rehab loan, each mortgage program has its own qualifying guidelines.

There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.

A mortgage professional will consider your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.

Pre-Qualification Letter Basics:

Getting a mortgage qualification letter prior to looking for a new home in the Bay Area with an agent is an essential first step in the home buying process.

Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms, a Pre-Approval Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will close on time.

There is a big difference between a Pre-Approval Letter and a Mortgage Approval Conditions List.

The Pre-Approval Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documents have been previewed. The Pre-Approval Letter is basically a loan officer's written communication that the Bay Area borrower fits within a particular loan program's guidelines.

The Mortgage Approval Conditions List is slightly more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.

Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before a loan officer issues a Pre-Approval Letter, the final Mortgage Approval Conditions List is where all of those conditions will come up. In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.

What's Included In A Pre-Qual Letter?

How Much Can I Afford?

Let's start with the most commonly asked question about mortgage. Getting a Pre-Approval Letter for a new home purchase in the Bay Area is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrow from the lender.

The Pre-Approval Letter is based on loan program guidelines pertaining to a borrower's DTI, LTV, Credit, Property Type and Residence Status.

A complete Pre-Approval Letter should let the borrower know the exact terms of the loan amount, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.

One of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a Bay Area borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.

7 Items to Look For On a Pre-Approval Letter

Loan Amount - Base loan amount and possibly gross loan amount (FHA, VA, USDA)
Status Date and Expiration Date - Most Pre-Approval Letters are good 90 days from when credit report is run
Mortgage Type - FHA, VA, USDA, Conventional, Jumbo
Term - 40, 30, 20 or 15 year fixed, ARM (Adjustable Rate Mortgage); if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
Occupancy - Owner Occupied, Secondary Residence, Investment
Contact Info - Lender's Name and Address
Conditions - Document and Funding requirements prior to Approval

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Frequently Asked Questions - Mortgage Approval Process:

Q. Why do I have to obtain another Pre-Approval Letter from a different lender when I make an offer on a particular Bay Area home?

Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender - who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.

In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they've selected has a back up plan should their current one not work out.

Q. I was pre-approved, but after I found a home and signed a contract, my lender denied my loan. Why is this a common trend that I hear about?

There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute, and then after the fact in some unfortunate instances.

With the borrower - credit scores, income, employment and residence status may change.

With the Bay Area property - appraised value, poor inspection report, title transfer / property lien issues, seller cooperation, HOA disclosures.

With the mortgage program - Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements etc.

It's important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team through the entire process so that they're aware of any delays or changes in your status that could impact your final approval.

Q. What happens if I can't find a home in the Bay Area before my pre-approval letter expires?

Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days income and asset documents, and have a new credit report pulled.

Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.

It's important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction over several months.

Q: Do I have to sell my current home before I can qualify for a new mortgage payment?

Yes, No and Maybe...

If you financially qualified to afford both your current residence and the proposed payment on your new house, then the simple answer is Yes!

Qualifying based on your Debt-to-Income ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties in the Bay Area or elsewhere. Everything from mortgages payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

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