The Four Pillars of Mortgage Approval
One of the most common questions we as mortgage professionals receive is some version of “Will I be approved?” Unfortunately there’s no simple answer to this question. There is a lot that goes into a loan approval. The conventional loan guidelines alone are over 1,300 pages. That’s why it’s important to work with a trusted advisor with a lot of experience, knows what they are doing, and can help guide you through the process.
While there is definitely a lot that goes into a mortgage, it helps to be able to break it down into the simplest parts. That makes it much more manageable and easier to understand, especially if you’ve never gone through the process before.
All mortgage approvals are loosely based on what I call the Four Pillars of Approval. The stronger the parts of these pillars, the better the qualification and increased likelihood of approval. Think of the pillars as the foundation underneath your home – you want a strong foundation.
The four pillars are as follows:
- Credit Score: The middle of a member's three credit scores as reported by the major credit bureaus. The higher the credit, the better.
- Equity/Down Payment: The percentage of equity or down payment in a home. (The difference between what’s being borrowed and the home’s value.)
- Income: Calculation of income versus debt.
- Reserves: The amount of liquid assets available after your loan closes.
When all four of these elements are within the required guidelines, more than likely we will have an approved loan. However, when any one element is lacking, it becomes more difficult and a home loan approval becomes less likely.
In future blogs and other information we provide, we will go into the details of what each piece of the four pillars mean and their requirements.
Understanding the nuances of mortgage lending is the best way to make sound strategic decisions. Talking with a trusted mortgage planning professional is the smart choice.