What factors affect a loan approval?
Many of the same factors that affect regular mortgage approvals affect preapproval mortgages.
Credit. Your credit history and credit score affect what loan programs, interest rates and down payment amount may be required on your loan.
• Employment and Income.
• Debt-to-Income Ratios.
• What Not to Do.
Your credit history and credit score affect what loan programs, interest rates and down payment amount may be required on your loan. Usually minor credit issues will not cause a loan to be denied, but they can lower your credit score and cause your interest rate to increase. The amount of the minimum payments already owed will affect how much home you can purchase.
Employment and Income
Your employment type and income history helps determine how much home you can afford. The preferred borrower works for a company and receives a regular salary or steady hourly pay. Lenders also offer loans to borrowers who are self-employed, or receive other types of no employment income such as retirement, social security, alimony and child support. Lenders examine these types of income ensuring there is a sufficient history of stable income and a likelihood of continuance for 3 years after the loan closes.
Lenders calculate your gross monthly income (amount of income before taxes or any deductions). They add up the minimum debts reflected on your credit report with any alimony or child support you must pay and combine it with the proposed mortgage payment. This amount is divided by the gross monthly income to determine your debt-to-income, or DTI, ratio. A homebuyer who earns R7500 gross income each month with R9000 of debt each month and wants to purchase a home with a mortgage requiring a R17000 monthly mortgage payment has a DTI of 33.84 percent. This is well within most mortgage requirements. Most mortgage companies want a DTI that does not exceed 40 to 45 percent.
Even if you are able to qualify for a zero down mortgage program, there are closing costs that must be paid when the loan closes. Some loan programs require the homebuyer to have reserves in the bank after all closing costs and the down payment have been paid. Your lender will require you to provide asset statements documenting where the funds to close are coming from.
What Not to Do
Do not make any other major financial changes. Even though you are preapproved, the lender can re-pull your credit report and will verify the information you gave. Do not make the mistake of buying a new car or obtaining any new debt–this can lower your credit score because of the new trade line and cause your DTI to go above approved levels. Avoid changing jobs during the home buying process. This will delay your full approval when a home is found, and if you are using income such as bonus and overtime to qualify, they may be disallowed, thus lowering your DTI and causing the lender to decline your loan.