Mortgage approval refers to that process in which a mortgage borrower is approved or considered as eligible for obtaining a mortgage loan.
When the mortgage lenders are thinking about extending a loan to a particular individual, they evaluate three domains of underwriting in the process of mortgage approval. They are known as the three "Cs" or Collateral, Capacity, and Credit Reputation.
Collateral: At the time of examining the collateral, the mortgage lenders take into consideration the amount of down payment, the value of the house, as well as the type of property.
Down payment: Normally, the mortgage lenders expect that the mortgage borrower will make a down payment ranging between 10-20 percent of the price of the house, as well as the payment of closing costs, which usually ranges between 3-6 percent of the amount of the mortgage loan. Many attractive schemes are offered by the mortgage lenders which ask for lower down payments as cheap as 3 percent or even no requirement for down payments in some instances. First time home buyers as well as low to moderate income home buyers find this type of programs suitable for their needs. Nevertheless, for availing lower down payment loans, mortgage borrowers have to buy private mortgage insurance. The origin of the down payment is also verified by the lenders.
Assessed value of the house: The mortgage lender would like to ensure that the amount of the mortgage is backed by the value of the house. Commonly, the mortgage loan amount cannot exceed 95 percent of the assessed value of the property or 95 percent of the sales price of the house, whichever is less.
Capacity: From the capacity point of view, verification of debt, income, as well as cash reserves is done. The application process becomes simple and fast if all the essential documentation is submitted to the lender. These things facilitate the lender to realize the ability of repayment of a mortgage borrower. Lenders give preference to those kind of mortgage borrowers whose housing expenditures (for example, taxes, insurance, mortgage payments, and special assessments) are not more than 25 to 28 percent of their gross monthly income and other long term loans (for which monthly payments are stretched out exceeding 10 months) clubbed with housing expenditures are not more than 33 to 36 percent of their gross monthly income.
Credit Reputation: While the mortgage lenders review credit reputation of an individual, they study his credit history. The lender asks for a credit report which is provided by a credit reporting agency. This helps to assess the capability of an individual regarding the repayment of a loan. If any credit problem is mentioned in that report, the borrower may be asked to submit a written clarification or explanation regarding that. Examples of such problems are foreclosures, judgments, or history of delayed payments.
If an individual is denied regarding a home mortgage loan, the lender has to clarify the reasons. If the application is accepted, the borrower receives the firm commitment and the preparation of the closing of the mortgage is done by the lender.