Mortgage Credit Approval

couple relaxing in new home

Credit approval is an application for financing that helps determine which homes are in your price range; most Realtors require you to have a credit approval letter before they line up homes for you to see. To get credit approved, you provide the same paperwork you would when making a formal loan request. The Mortgage Loan Officer will ask you for employment and income verification (paystubs and W-2’s and possibly tax returns); monthly debts (car payments, credit card payments, 401-K payments, student loans, etc) as well as statements for all deposit accounts.  They will also pull a credit report to assess your credit history.

Credit approval assures your application is approved for a loan based on information at that time, but is not a mortgage contract.

Typically, your monthly house payment should be around 28 percent of your total gross monthly income. Your house payment (monthly mortgage payment) includes the principal and interest to repay your loan and possibly escrow for real estate taxes and homeowner’s insurance. Your Mortgage Loan Officer can help you determine this. Your house payment may also include private mortgage insurance if you borrow more than 80% loan-to-value and could include monthly Homeowners Association Dues, if applicable.

Your total monthly debt, including your estimated house payment and other monthly debts, should not be more than 36 percent of your gross monthly income – this is a good rule of thumb!

Of course, these figures vary between lenders and loan products. How much you can afford also depends on the interest rates at the time of purchase and your down payment. The down payment is the difference between the purchase price and the loan amount. Down payments typically range from 3% of the purchase price to however much you can put down – there are also down payment assistance options available. The larger the down payment, the lower your loan amount and the less interest you will pay over the life of your loan.

And don’t forget to consider extra expenses like utilities, child care, groceries, gasoline, and savings. Even those these expenses aren’t considered as part of the approval process, they are still important for you to think about in calculating your monthly cash flow. Once in your new home, you want to be able to enjoy it and not feel financially strapped.