Mortgage Pre-Approval

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Home loan process

The process for getting a home loan, or mortgage, involves three elements: Collateral, Credit reputation, and Capacity.

Collateral is defined as something pledged as security for repayment of a loan. When it comes to a home loan, the most important element is the appraised value of the home. The lender will want to ensure that the value of your property will support the amount of the loan. Depending on the location, the value of your mortgage usually cannot exceed 90-95 percent of the appraised value of the home. An appraiser, hired by the lender, will estimate the value of the home that is for sale based on other homes in the neighborhood and what they have sold for, often called comparables or comps for short. Another form of collateral is the down payment. This is the amount of cash that the purchaser will put towards the purchase of the home. Depending on the lender, that down payment can vary between 10 and 20 percent of the home price. There are special programs available for down payments that are less that this amount. In these cases, the borrower will most likely be required to carry private mortgage insurance. Lenders will also want to verify where the down payment came from, usually from savings or the proceeds from an previous home purchase.

Your credit reputation or history is also a consideration for lenders when approving a loan. The lender will ask for a credit report from one or more of the three leading credit reporting agencies - Experian, TransUnion, and Equifax - to see how you have fared when it comes to borrowing money. Any credit problems in the past, such as any previous foreclosures, a history of late payments, or financial judgments, will have to be explained in greater detail. Sometimes these credit problems can be overcome, and sometimes they cannot.

Capacity is the third element used to determine the approval of a loan. Your capacity includes your income, your debt, and any cash reserves that you may have. All of these items will help the lender to better understand your capability in repaying the loan. There are certain guidelines around housing expenses, which includes your mortgage payment, homeowners insurance, property taxes, and any special assessments, and that they not exceed 25 to 28 percent of your gross monthly income. Other long-term debt, which is defined as payments that will extend beyond 10 months, added to your housing expenses should not exceed 33 to 36 percent of the gross monthly income.