While there’s no guarantee that checking most of the boxes will lead to a mortgage loan approval, here’s how to know if you’re on the right track.
There's no guarantee that an individual lender will approve your mortgage. However, there are proactive steps you can take to increase your chances of getting a mortgage loan approval. The good news is that you don't need each factor to be exceptional.
However, you need a sufficient combination of factors to demonstrate to lenders that you can repay the loan (and on time). Whether you’ve already applied and fear being rejected or aim to buy a home within the next few years, it’s always the right time to evaluate your financial situation. Believe it or not, you have more control than you probably think you do over getting the green light from a top mortgage lender. Here are solid indicators that a mortgage loan approval is on its way.
Sign 1: Strong Credit Profile
This is probably the most obvious, but your credit score needs to be as high as possible to get the best lender, rates and options for your loan. It shows the mortgage lender that you have been responsible with your credit and are at low risk if they take you on. Take this as your cue to start improving your credit score — you can even raise it overnight!
“Although there are lenders with no minimum credit score requirements, the majority want to see scores above 620 for conventional financing, while scores above 720 generally receive best rates and options,” says Brian Shahwan, VP mortgage banker & broker at Melissa Cohn Group. “Note that late payments and disputed accounts will also show up on the hard pull, so the higher the score and cleaner the report, the better.”
Sign 2: Low Debt-to-Income Ratio
A mortgage lender ideally wants someone with low liabilities. One way to do this is to have a low debt-to-income (DTI) ratio, which means that a low percentage of income goes to debt each month.
“This would be things like credit card balances, student loans, auto loans and existing mortgages,” says Shahwan. “The more debts a borrower has, the higher their DTI ratio will be. The DTI ratio includes the future mortgage payment, so it is important to keep monthly liabilities as low as possible for qualifying purposes.”
According to Evan Luchaco, home loan specialist for Churchill Mortgage, “The DTI ratio is often the biggest hurdle for most borrowers, where the home they want or the median home price in their area is greater than they can afford. It’s not that a customer won’t qualify for a home, but rather that they don’t qualify for THE home they want.”
Sign 3: Stable Income
Banks and credit unions want to see your history in your job or field, indicating that you’ll continue having the funds to pay off your mortgage. “Stable employment and income, preferably with at least two years in the same job or industry, indicate a consistent ability to make mortgage payments,” says Edward Asher, treasurer at Better.com.
You shouldn’t be concerned if you’re self-employed, as many programs cater to different kinds of hopeful homebuyers. “Self-employed borrowers can benefit from bank statements and profit and loss programs, retired individuals can consider individual retirement arrangement (IRA) distribution programs and debt-service coverage ratio (DSCR) programs can be highly beneficial for investors,” explains Shahwan.
Sign 4: Sufficient Down Payment
Not every type of loan requires a down payment. For those who do, having a strong one not only helps with your monthly payment but also shows lenders that you’re all in.
“A down payment, even a small one, demonstrates financial commitment and can influence loan terms – 3% to 5% is common for conventional loans, while VA and USDA loans require none,” says Asher.
Beyond the down payment, lenders like to see that you still have assets after you hand over that large chunk of money. “Many banks will also have reserve requirements, which is money left in the accounts post-closing,” says Shahwan. That all plays into having a strong financial history, which leads us to the last mortgage loan approval indicator.
Sign 5: Solid Financial History
Owning a home isn’t to be taken lightly, and you don’t want to take on a mortgage unless you’re confident you can comfortably meet the monthly payments. So, it’s helpful to show lenders you have a reputation for being on top of your finances.
“A track record of responsible financial management, such as a history of savings and avoiding overdrafts, reassures us that the borrower can handle the long-term responsibility of homeownership,” says Asher. So, now is the time to look into any outstanding bills that could hurt your chances of securing the loan you want.
Bottom Line
Since everyone’s financial history and situation are so vastly different, there’s no way to put exact numbers on what will lead you to receive a mortgage loan approval. The best thing to do is ensure these five indicators are in tip-top shape. Remember, even if you don’t hit it out of the park for each one, having a generally healthy portfolio can lead to success. If you’re purchasing a home with a partner, ensure their finances are in good standing.
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Millions of readers trust Benzinga monthly for their financial news and corporate and economic data insights. We’ve earned a reputation for being a trustworthy source because we strive on reporting the most up-to-date information and connecting with professionals to provide their expert takes. Caitlyn Fitzpatrick, the author of this piece, has been an editor and writer since 2014. Her expertise lies in commerce journalism, meaning she cares about how you spend (and borrow) your money.
We spoke with Brian Shahwan, VP mortgage banker & broker at Melissa Cohn Group, Evan Luchaco, home loan specialist for Churchill Mortgage and Edward Asher, treasurer at Better.com. They detailed the top indicators that a potential homeowner will be approved for a mortgage loan.
Frequently Asked Questions
How common is it to get denied for a mortgage?
The good news is that even if your loan does get denied, that doesn’t mean no forever. “Mortgage denials are relatively common, but approval rates vary based on factors like credit score, loan type and lender requirements,” says Asher. “Strengthening credit, reducing debt, increasing savings and thoroughly reviewing lender requirements before applying can significantly boost the chances of approval. Many applicants who are initially denied can qualify later with the right financial adjustments.”
How long do mortgage loan approvals take?
Again, this depends, but you shouldn’t wait too long for a mortgage loan approval. “If you’re working with a lender you can trust, a preapproval should take three to seven business days,” says Luchaco. “Full loan approvals for an under-contract client normally take 30 days, but they can happen as quickly as 10 days if all borrower documents are ready and third parties can provide the needed documents (appraisal, title, etc.).”
What does mortgage loan approval mean?
Don’t get your hopes fully up at this point, but things are moving in the right direction. “Mortgage loan approval is offered when a loan file has been reviewed by the underwriter and deemed eligible for financing,” says Shahwan. “This is not a full and final commitment letter but gives borrowers confidence that the bank has reviewed the loan and agreed to close upon conditions being met. Conditions could include items like the title report, appraisal report, building approval and updated borrower documents.”
Sources
- Brian Shahwan, VP mortgage banker & broker at Melissa Cohn Group
- Evan Luchaco, home loan specialist for Churchill Mortgage
- Edward Asher, treasurer at Better.com
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.