Let's break down the steps of the loan process so that you can be prepared when you’re ready to get started.
The first step is to get pre-qualified or pre-approved.
When you submit this initial application, the lender’s goal is to find out if your credit score meets the minimum needed for the loan program.
The lender pulls a copy of your credit report that's going to be from each of the credit bureaus: transunion, equifax and experian.
First, they look at the middle credit score, if there is more than one borrower, they look at the lower middle credit score.
What they look at next is the credit history. This includes ensuring that there aren’t any past credit issues like late payments or collections or even a foreclosure and a bankruptcy.
So keep in mind that when lenders are looking at any kind of current debts or expenses, they’re really going to look at what's reflected on the credit report. And that usually includes your credit card history.
Now, if you pay your balance off every month, lenders are counting on the fact that you pay the minimum payment that's required. Once that is settled, then what lenders will look at is your income.
If you are actively employed, what type of an employee are you? Are you 1099 or are you W2? Because the source of your income and how long you’ve had it, can impact how much lenders can count.
Also, if parts of your income include bonuses or commissions or maybe you have variable hours of beneficiary IRA or child support or alimony, more detail is required on how long you've received that so then lenders know how much you can count.
And then the third category is assets. Lenders look at your assets as the source of your down payment. Are they funds that you already have? Are you selling a home? Are you getting a gift? Are you using down payment assistance?
Depending on how those assets are held, it may impact how much of those assets can be counted. Once lenders have all of these components, those three main pillars of a loan application, they will look more into your purchase goals.
For example, target sales price or target monthly payment?
After all of that work is done, what you'll then hear from your lender about are your pre qualification details which will be based on your credit report.
Accordingly, your lender will recommend a loan type with a specific down payment and the estimated monthly payment.
The next step is pre-approval, which is where the lender is going to collect the documentation that backs up everything you've just put in your loan application so it can be reviewed by underwriting.
That way, everything is set before you fall in love with a home and put it under contract. So yes, while submitting an application you are answering a lot of questions, but that is so that ultimately, your lender can formulate the best mortgage strategy for you.
So, although it would be wonderful if you could have an answer immediately, there is still quite a bit of manual work that goes into reviewing an application to make sure that the answer your lender is giving you is both accurate and also actionable.
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