Signs Your Mortgage Loan Will be Approved

Applying for a mortgage can be an exciting moment to take steps into home ownership. How much will the lender approve for your home, and how do you know if you'll get approved? There's more in your control than you might realize. Look at these signs your loan will be approved to see how prepared you are for mortgage approval. 

Key Indicators That Your Mortgage Loan Is Likely to Be Approved

While there's no guarantee that an individual lender will approve your mortgage, there's a lot you can do to increase your chances of loan approval. You don't need each factor to be exceptional; you just need a sufficient combination of factors to demonstrate to lenders that you can repay the loan. From a strong credit score and low debt-to-income ratio to stable employment and the property's condition, here's what you need to consider.

Strong Credit Score 

A strong credit score is one of the first factors lenders look at for mortgage approval. It indicates the probability that you'll repay the loan or default. The higher your credit score, the greater your chances of loan approval.

The FICO scale ranges from 300 to 850. While most lenders will accept credit scores of 660 or above, some will accept credit scores as low as 580. In exceptional cases with other factors like a larger down payment, a score of 500 could be enough to secure a mortgage with certain lenders. 

However, the lower the credit score, the more likely you'll be offered a high interest rate, so it's worth taking steps to increase your credit score or repair your credit.  

Significant Down Payment

While the minimum down payment of many mortgages is 3%, having a larger down payment can increase your chances of approval, even with other weak factors, like credit score or debt-to-income ratio. If you have a 20% down payment, you won't be required to take private mortgage insurance, leading to additional savings on that cost. 

Low Debt-to-Income Ratio

Lenders look for a debt-to-income ratio below 30%. In some cases, you could be approved for a mortgage with a debt-to-income ratio of up to 40%. The lower your debt-to-income ratio, the greater the chances of mortgage approval. 

Stable Employment and Income

Lenders look for stable employment for the two years before the mortgage application. During that time, your income should be stable or increasing to increase your chances of mortgage approval. 

If you're self-employed, have recently changed jobs, or cannot demonstrate stable employment, securing a mortgage is possible, but you'll need to strengthen other factors. You might need to show bank statements, savings or proof of assets. Likewise, if you changed jobs for a more senior position in the same industry, it shouldn't affect your approval chances.  

Adequate Documentation

You must prove income, employment and assets to get approved for a mortgage. Gathering income statements, tax returns, bank statements and proof of assets can help to speed up the mortgage approval time. 

Value and Condition of the House

One of the factors that you can research ahead of time with your Realtor is the value and condition of the home. Lenders look at the loan-to-value ratio. Loan-to-value (LTV) is calculated by dividing the loan amount by the home's value.

For example, if the loan is $300,000 and the property's assessed value is $280,000, the mortgage may not be approved because the loan amount is higher than the property's value.  

Co-Signer

If you know that you have several factors a lender may consider weak, such as inadequate proof of employment or a lower credit score, getting a co-signer can increase your chances of mortgage approval. The co-signer is responsible for making the monthly mortgage payments if you fail to do so. A co-signer that can increase your chances of mortgage approval will have a high credit score, stable employment and/or significant assets or savings. 

Types of Mortgage Loan Approvals

Mortgage approval is a multistep process with various types of mortgage loans, from preapproval or conditional approval to the final approval when you're ready for closing. Here are the steps to consider. 

Preapproval

Mortgage preapproval is an initial review by the lender to suggest how much you can borrow. You will receive a preapproval letter from a lender stating how much the lender is tentatively willing to lend. A preapproval letter allows you to make an offer on a home and sign the purchase and sale agreement. 

Conditional Approval

Conditional approval means the mortgage lender will likely approve your loan application if you meet certain criteria. Conditional approval does not guarantee final approval but is one step beyond prequalification and signals a strong chance of approval. You'll get conditional approval if there are additional requirements the lender needs before formal approval. 

Formal Approval

Formal approval is the final step in securing a mortgage. You'll get formal approval when your loan officer is ready to move toward closing the sale. This is the lender's final decision to approve you for a mortgage; you're ready to close on the sale. 

Get the Best Mortgages from Benzinga’s Top Home Loan Lenders

Find Benzinga's best home mortgage lenders to help you through the mortgage approval process to secure a loan. 

Preparing for Mortgage Approval

With a few proactive steps, you can control the factors that increase your chances of mortgage approval. Remember that comparing multiple lenders is essential to get the most favorable terms and interest rates. The more factors you can optimize before applying for a mortgage, the greater your chances of lower interest rates and better terms. Find the best mortgage lenders for first-time home buyers here. 

Frequently Asked Questions