When you apply for a home loan, the lender will consider several factors before approving or denying your application. Your credit scores from the major credit bureaus – Experian, TransUnion and Equifax – can mean the difference between getting a loan with competitive terms, being offered a steep interest rate or not being able to get a mortgage. The amount you earn is equally important in the eyes of lenders as both provide insight into how you manage debt and if you’re able to afford the mortgage payments.
Traditional and NQ Mortgage Loans
What is the Process for Mortgage Approval?
There are several loan products that come with a rapid application, approval and funding timeline. Mortgages don’t quite work that way, though. It could take weeks or even months for a home loan application to be approved and funded.
Here’s an overview of the mortgage approval process from start to finish:
- Step 1: Get pre-approved. This step is optional, but it gives you an idea of how much home you can afford, along with potential rates. It can also give you a competitive advantage if you decide to put an offer on a home, as the seller will know you mean business.
- Step 2: Submit a formal application. You can typically start the process online and upload any financial documents the lender needs.
- Step 3: Undergo income verification by the lender. The lender will also verify your credit score, debt load (based on the accounts listed on your credit score) and assets.
- Step 4: Schedule a home appraisal. The loan will not close until the appraisal is complete since it tells the lender how much the home is worth, which is needed to ensure the loan amount is adequate.
- Step 5: Await the results of the title search. The last step before closing is the title search and title insurance, which confirms no other parties have legal rights to the property. The process is handled through a title company.
- Step 6: Receive a lending decision. If everything checks out, you’ll receive final approval and clear-to-close on the loan.
Common Eligibility Income Criteria Required for a Mortgage
In the mortgage world, there are two ratios to keep in mind when considering how much home you can afford:
- Front-end debt to income ratio: the percentage of your gross monthly income that’s spent on your mortgage payment (including principal, interest, taxes and insurance)
- Back-end debt to income ratio: the percentage of your gross monthly income that’s spent on all debt obligations (including your projected mortgage payment)
*Quick note: If you’re self-employed, the lender will use your net income (after business deductions). To reach the monthly income figure, they will divide the total you’ve earned, as reflected in your two most recent tax returns, by 24. To illustrate, if the sum of your net income is $144,000 for the past 24 months, the lender will use $6,000 as your monthly income figure.
Historically, the rule of thumb was that your front and back-end DTI ratios shouldn’t be more than 28 percent and 36 percent, respectively.
But nowadays, there’s generally a lot of flexibility with those figures. In fact, several lenders permit DTI ratios of up to 43 percent, and some go even higher. It depends on your credit score, assets and down payment amount.
Traditional and NQ Mortgage Loans
Proof of Income Requirements for Mortgage Loans
It’s not enough to input your income amount on the application and expect the lender to take your word. Instead, prepare to provide copies of your most recent pay stubs and W-2 form. Ideally, you want to have two years of consistent income, ideally in the same field, to be a good candidate for a mortgage. You can also provide documentation in the form of an income letter if these documents are unavailable because you recently took a new job.
But if there are gaps in your employment, you could have trouble getting approved for a mortgage unless you have a valid reason.
Self-employed applicants have slightly different documentation requirements. In most instances, tax returns from the two most recent years that reflect a consistent or increasing income will suffice. Some lenders will also request a profit-and-loss statement and possibly the last two to three months of bank statements.
Beyond pay stubs, W-2 forms and tax returns, the lender will take the verification a bit further by connecting with the IRS to confirm the amounts listed on your documents. This is done through IRS Form 4056-T, a document you’ll need to sign and authorize the lender to send directly to the IRS to have your tax records released.
No-Income Verification Mortgage
No-income verification mortgages are an option for non-traditional earners, high net worth individuals and self-employed borrowers who are unable to qualify for a traditional home loan due to income requirements. They’re backed by private lenders, and you won’t have to provide the traditional income documentation to get approved.
If you’re ready to apply for a no-income verification mortgage, Angel Oak Home Loans can assist. The full-service mortgage lender offers three innovative no-income verification mortgage products that could work for you:
- Asset Qualifier Home Loan: If you have a sizable amount of liquid assets from checking or savings accounts, investment accounts or retirement accounts, you could be eligible for this loan product. There are no minimum income requirements or debt-to-income (DTI) requirements, and loans are capped at $3 million. The loan proceeds must be used to purchase or refinance (through a rate-term or cash-out) a primary residence. You’ll also need at least $500,000 in assets that are seasoned for no fewer than six months post-closing.
- Investor Cash Flow Home Loan: Expand your real estate portfolio with a cash flow loan that doesn’t require employment information or tax returns to qualify. The maximum loan amount is $1.5 million, and the amount you’re eligible for is based on projected earnings from the property you’re planning to acquire. One-to-four-unit properties are eligible, with the exception of non-warrantable condos and condo hotels.
- Foreign National Program: This loan product helps non-residents (with a B-1, B-2, H-2, H-3, I, J-1, J-2, O-2, P1 or P2 Visa) acquire primary and secondary residences in the United States. Approval is based on the cash flow generated by the property, and loans between $75,000 and $1.5 million are available. Other requirements include a maximum loan-to-value of 70 percent (or 65 percent for cash-out refinances), 12 months of reserves in a U.S. bank, and asset seasoning of at least 60 days. Gift funds are not permitted, and loans cannot be used to acquire property in sanctioned countries or Osceola County.
Get a quote today on the website, and it’s fast and free. A member of the Angel Oak Home Loans team will contact you to discuss traditional and non-qualified home loan options.