Home loan guidelines vary by lender, housing market and program, which makes gaining approval a changing process. Despite the many factors that affect home-loan approval, there are some generally accepted steps and rules for funding a home purchase or mortgage refinance.
Find the Right Lender
Mortgage borrowers have a vast variety of lenders waiting to fund their next home loan. From a brick-and-mortar bank or credit union, to mortgage brokers and online lenders, the choice of lender depends on personal preference and financing options.
You may need to shop more than one company before choosing the right lender. You can interview multiple loan officers to get basic information about their mortgage rates and programs. However, you won't know the actual terms you're likely to receive unless you submit to a credit check and application process. Once you receive a lender's rates, figures, estimated turnaround times and final approval conditions -- all facts you need to consider -- you can select a lender.
Prepare the Paperwork
After an initial pre-approval process, the lender provides a list of conditions you must meet to gain final loan approval and fund your home loan. A conditional loan approval lists income, credit, asset, employment and property-related documentation that a mortgage underwriter needs to make a final decision. Typical approval conditions include:
- Recent paystubs and tax returns for income verification purposes.
- Recent bank and investment account statements and a verification of deposit, or VOD, for banks to complete.
- Verification of employment, or VOE, for employers to complete.
- Letter of explanation, also known as LOE or LOX, to clarify any credit or financial circumstances the lender has called into question.
- Purchase agreement and addenda.
Third-party service providers submit documents to the lender on your behalf. This includes escrow and title paperwork, such as transaction instructions, title abstract or preliminary title report, and title insurance policies.
Provide an Appraisal
With the exception of certain refinances, lenders require an appraisal report for the home you plan to buy or refinance. It provides a professional opinion of value, which serves as proof that the home is sufficient collateral for the loan amount requested. Your lender orders a home appraisal and you pay for it. Appraisals typically cost $300 to $400, according to Realtor.com.
Meet Minimum Guidelines
Documentation only results in home loan approval if it shows that you meet all of the lender's minimum qualifying guidelines. These criteria include:
- Loan-to-value, or LTV, which measures the loan amount relative to home value.
- Debt-to-income, or DTI, which measures your debt obligations relative to gross monthly income.
- Credit scores.
- Cash to close, such as down payment funds and closing costs.
Typically, lenders prefer an LTV no higher than 80 percent and may impose higher loan costs if you surpass this threshold. Lenders also prefer a DTI no higher than 43 percent for your entire debt load, including the new mortgage. Credit score requirements vary widely, however, a 620 or 640 is generally the lowest acceptable credit score needed to obtain home loan approval.