Posted about 5 hours ago

How to get approved for home mortgages?

Conventional Mortgage

If you are in USA and want to buy a primary residence (or investment property) with financing - this letter is for you. If not, you will learn all the steps required to get approval for home mortgages in the USA (it might be similar to the other parts of the world too). You might ask - “how much do you know”? I bought 29 real estate properties (and already sold a few of them) in the last 8 years and I have applied for close to 35 home mortgages (including refinancing). I worked with 20 different lenders and I was approved for all of them except one (the appraisal came way below the purchase price in that case). So I have developed a good sense of understanding what are the things you should look for while applying for mortgages and what to avoid at all costs. Since I have worked with so many lenders over the years, some are great to work with and some are not so good (they have inefficient systems for approving loans). One lender just took 14 days from start to finish to approve my application in 2021 and a couple of lenders took almost 6 weeks before approving the application. If you want to know whom you are dealing with, you should keep reading.

Loan Processing Team

If you are working with a typical lender (not a mortgage broker), your loan processing team consists of 3 different groups.

- Loan Officer (First point of contact to get all of your information and provide you mortgage preapproval letter).
- Loan Processor (Second point of contact who will collect any additional documents from you and try to make the process as smooth as possible).
- Underwriter (This is the third person who will look into all the details and finally approve the loan, you won’t have any communication with this person and won’t know who this is).

If you are working with a mortgage broker, typically he/she is working as both loan officer and loan processor. Mortgage brokers can shop for mortgages with different providers and might give you a better rate (not always the case though).

Loan Application process

The loan application process starts when you submit Uniform Loan Application (Form 1003) to the lender. You can download it from online.

Become familiar with the whole application process even before considering submitting an offer to the property. As the saying goes - “opportunity comes to the prepared minds”. That’s my secret of getting approved for so many loans.

Collect all the documents:

INCOME
- - Recent pay stubs (last 30 days)
- - Two years of W2s
- - Two years of federal tax returns with all schedules
- - Year-to-Date profit and loss (P&L) statement for self-employed borrowers
ASSETS & RESERVE
- - Two months of most current asset statements for all banking and investment accounts, including any blank pages (Word of caution here: if you are not using any specific account for down payment or reserve, you don’t need to provide that information)
- - Most recent statements for retirement accounts (IRA, 401k)
- - You can use 70% of brokerage account balances as reserve
- - You can use 60% of retirement account balances as reserve as long the account explicitly says you can withdraw the balance due to hardship in their prospectus summary (the lender does not want to lose money).
IDENTITY
- - Copy of driver’s license or other proof of identity
- - Last two year’s residence history (rental history & property manager’s contact information if you were renting)

Rental Property Owners

- Mortgage statement for all properties owned
- Current leases for all the properties (security deposit and first month rent deposit proof if the property was not in the last year’s tax return)
- Homeowner’s insurance & Tax receipts for all properties owned (if not escrowed)
- This site will be your best friend about documenting rental income: Rental Income (I cited this page countless times to the loan processor while arguing that I know I am right and this is the actual documentation about where you will sell the mortgage finally).
- You can use the prospective rental income to qualify for the application process. The lender needs to order a rent appraisal for the property to calculate the market rent. And you can document only 75% of rental income during the qualification process. (In 2019, I needed to tell this to a loan officer who didn’t know about it).

DTI & Reserve

Acronyms

DTI: Debt of Income ratio
PITI: Principal, Interest, Tax & Insurance
PI: Principal & Interest
LTV: Loan to Value
SSN: Social Security Number
DSCR: Debt Service Coverage Ratio
UW: Underwriter
LO: Loan officer
Escrow: Account to hold tax & insurance separately mortgage balance

Let’s talk about how much DTI you will need and how much reserve you should have. DTI & reserve requirements vary from lender to lender. The first question I ask the lender how much is their DTI requirement is.

Best case scenario

- Credit score > 720 (to get the best rate)
- DTI ~ 43, PITI ~ 36 (most of the lenders use this number)
- Reserve ~ six months of total PITI amount

I was approved for max DTI ~ 50.5 in the few loans after gaining credibility & experience. So look around, shop for mortgages, ask for referrals - you might be surprised by what you find. You can shop for mortgages in the 40-day window where all the hard credit inquiries count as 1 mortgage inquiry.

DO & DON'T

Now this section is really important while you are in the process of mortgage loan application. The list is not exhaustive, but will give some good idea of what to do and more importantly not to do during the loan application process.

DO

✅ Maintain your income (keep the job & income steady)

✅ Pay bills on time (any late payment will hurt your mortgage approval)

✅ Maintain paper trail for all transactions related to real estate

DONT

❌ Change employment

❌ Apply for new credit (car loan, credit card, any large purchases using credit)

❌ Make large bank deposits i.e. cash or other instant payment transfer

❌ Amend tax return or change residence

❌ Spend money from the reserve account

My Final thoughts

Communication is the main key to the loan approval process. If you can prepare all the relevant documents even before applying for home mortgages, you are most likely ahead of 99% of the applicants. Keep the following things in mind during the process:

- Don’t volunteer any extra information if the loan office/UW does not ask for it (any new information will need a paper trail/proof)
- Try to provide the requested document in 2 business days to keep the process moving (I had one lender who did not review the documents more than once in a week).
- Keep calm in the process (sometimes I struggle with that too)

Good luck with your next purchase :)

You can read the full post here: https://ec007t.substack.com/p/how-to-get-approved-for-home-m...