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How Mortgages are Approved

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May 4, 2023

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Are you planning to buy a home but wondering how mortgages are approved? The mortgage approval process can seem complex, but with the right guidance, it can be straightforward and stress-free. That's where Hitch comes in - we're here to guide you through the process from start to finish.

So, how exactly are mortgages approved? Let's break it down.

1. Application

When applying for a mortgage, you'll need to provide detailed information about your financial situation. This includes your income, which may include salary, bonuses, commissions, and any other sources of regular income. You'll also need to provide your employment history, including the name and contact information of your current employer.

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Providing accurate and comprehensive information in these areas is essential to ensure a smooth mortgage approval process. By having this information readily available and organized, you can help ensure a successful application and increase your chances of being approved for a mortgage.

2. Credit Check

Once you submit your mortgage application, the lender will pull your credit report to assess your creditworthiness. This will typically involve a credit check, which is a review of your credit score, payment history, and outstanding debts.

Your credit score is a numerical representation of your creditworthiness, based on your credit history. A higher credit score indicates that you're more likely to be a responsible borrower and make on-time payments. This can increase your chances of being approved for a mortgage and can also result in more favorable loan terms, such as a lower interest rate.

In addition to your credit score, lenders will also review your payment history. This includes your history of making on-time payments on your debts, such as credit card bills, car loans, and other loans. Late payments can negatively impact your credit score and can make it more difficult to be approved for a mortgage.

Finally, lenders will review your outstanding debts, including credit card balances, car loans, and other debts. This information is used to calculate your debt-to-income ratio (DTI), which is a measure of your ability to manage your debt payments. A lower DTI indicates that you have a manageable level of debt and are more likely to be approved for a mortgage.

Overall, the credit check is an important part of the mortgage approval process. By evaluating your creditworthiness, lenders can determine your ability to repay the loan and offer you appropriate loan terms. It's important to maintain a good credit score and payment history to improve your chances of being approved for a mortgage with favorable terms.

3. Financial Review

After the credit check, the lender will review your financial information to determine how much you can afford to borrow for your mortgage. This financial review is a critical step in the mortgage approval process.

The lender will consider several factors during this review, including your income, debt-to-income ratio (DTI), and down payment. Your income is a critical factor because it determines your ability to make mortgage payments on time. The lender will review your income sources, including your salary, bonuses, commissions, and other sources of income to calculate your monthly income.

The DTI is another critical factor the lender will consider during the financial review. This ratio compares your monthly debt payments to your monthly income. Generally, lenders prefer a lower DTI, which indicates that you have a manageable level of debt. A lower DTI may also increase your chances of being approved for a mortgage.

Finally, the lender will consider your down payment amount. The down payment is the amount of money you're able to put down on the home upfront. A larger down payment can result in more favorable loan terms, such as a lower interest rate or lower monthly payments.

Based on the financial review, the lender will determine how much you can afford to borrow for your mortgage. This will help you determine your price range when house hunting and ensure that you're not looking at homes that are out of your budget. It's important to provide accurate financial information during the review process to ensure a successful mortgage approval.

4. Home Appraisal

As a homebuyer, the lender will require a home appraisal to determine the value of the property you're looking to purchase. The appraisal process involves a licensed appraiser who will assess the property's value by considering factors such as the location, size, condition, and comparable homes in the area.

The home appraisal is a critical step in the mortgage approval process because it ensures that the home's purchase price is in line with its appraised value. The lender will use the appraised value of the home to determine the maximum amount they're willing to lend you. If the appraised value is lower than the purchase price, the lender may require you to make up the difference or may refuse to approve the loan.

The appraisal process typically involves a physical inspection of the property, including an assessment of the interior and exterior of the home. The appraiser will also research comparable homes in the area to determine the property's value. This information is compiled into a report that is submitted to the lender.

It's important to note that the home appraisal is not the same as a home inspection. While the appraiser will assess the condition of the property, they are not looking for issues such as electrical problems, plumbing issues, or other defects that may affect the home's livability. It's recommended that homebuyers also obtain a home inspection to identify any potential issues with the property.

Overall, the home appraisal is an important step in the mortgage approval process that ensures that the home's purchase price is in line with its appraised value. It's important to understand the appraisal process and provide accurate information to ensure a successful mortgage approval.

5. Underwriting

After you have submitted your mortgage application and provided all the necessary financial information, the lender will send your file to underwriting for review. The underwriting process is a comprehensive analysis of your financial information to determine whether you meet the lender's lending criteria.

During the underwriting process, an underwriter will review your credit history, employment history, income, debt-to-income ratio, and the property appraisal. The underwriter will also evaluate whether you meet the lender's specific lending guidelines and requirements.

If the underwriter approves your mortgage application, they will issue a clear to close (CTC) notification to your lender, indicating that you have met all the necessary requirements and are approved for the loan. If there are any issues or concerns that arise during the underwriting process, the underwriter may require additional documentation or clarification before issuing a final decision.

It's important to note that the underwriting process can take several weeks, depending on the complexity of your financial situation and the lender's workload. The underwriter's goal is to ensure that the lender is making a sound investment by approving your mortgage application and that you are capable of repaying the loan.

Overall, the underwriting process is a crucial step in the mortgage approval process that evaluates your financial information to determine your creditworthiness and whether you meet the lender's lending criteria. It's important to be patient during this process and provide any additional documentation requested by the underwriter to ensure a successful mortgage approval.

6. Approval

If your mortgage application has passed through the underwriting process and meets the lender's lending criteria, you'll receive a commitment letter from the lender. The commitment letter outlines the terms of the loan, such as the interest rate, repayment term, and any conditions you need to meet before closing.

The commitment letter is a legally binding document that provides you with the details of your mortgage agreement, including the loan amount, interest rate, repayment term, and any fees associated with the loan. It will also include any conditions that you need to satisfy before the lender will release the funds for closing.

Examples of conditions that you may need to meet could include providing proof of employment or income, clearing up any issues on your credit report, or providing additional documentation related to the property. It's important to carefully review the commitment letter and ensure that you understand all of the terms and conditions of the loan before signing it.

Once you've met all of the conditions outlined in the commitment letter, the lender will prepare the final closing documents, and you'll be ready to close on your mortgage. This typically involves signing a stack of paperwork and paying any closing costs associated with the loan.

At Hitch, we understand that the mortgage approval process can be overwhelming. That's why we're here to help. Our team of experts will guide you through each step of the process, ensuring that you have the information you need to make informed decisions. We work with a wide range of lenders to find the best rates and terms for your unique situation.

Ready to get started on your home buying journey? Contact Hitch today to learn more about how we can help you get approved for a mortgage and into your dream home.

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