Underwriting

Pre-Approval

Mortgage pre-approval is a formal evaluation by a lender that determines how much you can borrow based on your income, assets, credit, and debts. It involves a credit check and document review and results in a pre-approval letter that shows sellers you are a serious, qualified buyer. Pre-approval is more thorough than pre-qualification and carries more weight in competitive markets. A pre-approval letter is typically valid for 60 to 90 days.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward paying debts, including your mortgage, car loans, student loans, and credit card minimums. Lenders use DTI to evaluate your ability to manage monthly payments. Most mortgage programs prefer a DTI of 43 percent or lower, though some programs allow up to 50 percent with compensating factors. A lower DTI improves your chances of approval and may qualify you for better rates.

Appraisal

An appraisal is a professional assessment of a property's market value, conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the home is worth at least as much as the loan amount. The appraiser evaluates the property's condition, features, and location, and compares it to recent sales of similar homes in the area. The buyer typically pays for the appraisal, which usually costs between $300 and $600.