Pre-Qualification
Why is a simple prequalification alone usually not enough when starting your mortgage search?
A loan prequalification is usually just a best estimate by a loan officer after a brief period of conversation and little gathering of information. This guess assumes all the information you supplied was accurate. You may even get a prequalification in writing on the lender's letterhead, but the lender is not providing a commitment to lend, that involves going a step further in the process, to a Pre-Approval
A preapproval involves an in depth examination of your credit history, financial situation, and sometimes the property itself. The lender will independently verify the facts you supplied on your loan application. They will collect and examine your W-2's (tax returns if self employed), pay stubs, credit report, and your bank and other asset statements. You should then receive (request if you do not) a written commitment to lend on a specific property. The only conditions usually present on a lender's preapproval are a satisfactory appraisal of the property, clear title, and proof of homeowner's insurance and flood insurance if required.
What the Underwriters look at:
These are very simplified guidelines of what a typical mortgage underwriter will consider when evaluating your mortgage application for a conventional (Fannie Mae) loan. In the past few years, most of these rules have not only been bent but shattered. But first the basics:
1) Debt to income- The ratio of your total debt divided by your total income, the written limit is 36% although 40% is now the unwritten standard. This is figured on gross income.2) Income and job stability, 2 years at same job or in same industry preferred.3) Cash reserves are usually required to be seasoned (in your account for at least 6 months) and enough to cover your down payment, closing costs, and the first 2 months of mortgage payments.4) Loan to Value (LTV in mortgage speak) is the amount you are borrowing divided by the appraised value of the house.5) Property appraisal- Underwriters will go over the appraisal with a microscope and may deem either the appraisal or the subject property unsuitable to lend against.
1) Debt to income- The ratio of your total debt divided by your total income, the written limit is 36% although 40% is now the unwritten standard. This is figured on gross income.2) Income and job stability, 2 years at same job or in same industry preferred.3) Cash reserves are usually required to be seasoned (in your account for at least 6 months) and enough to cover your down payment, closing costs, and the first 2 months of mortgage payments.4) Loan to Value (LTV in mortgage speak) is the amount you are borrowing divided by the appraised value of the house.5) Property appraisal- Underwriters will go over the appraisal with a microscope and may deem either the appraisal or the subject property unsuitable to lend against.
Automated Underwriting
In the past 3-5 years there has been a major move in the mortgage industry away from human underwriters and to a more subjective way of measuring a borrower. This is called automated underwriting. You have a computer program that makes a decision based on the same basic criteria as above. Your application information is entered into a computer and the software makes a decision as to whether or not to approve your loan. The main difference is that automated underwriting will often use compensating factors such as a high credit score or low loan to value to approve the loan despite shortcomings in other areas of the application. I have seen loans with excellent credit that were approved with an 80% debt to income ratio when 40% is now the industry norm.
There is usually much less documentation required when a loan goes through an automated underwriting system (known in the industry as Desktop Underwriting) and loans sometimes close in several days now instead of several weeks. The human underwriter's role is reduced to verifying the documentation requested by the computer program and evaluating the appraisal.
The bottom line is that due to this automated underwriting it has become easier than ever to qualify for a low rate home mortgage.