What Do Mortgage Lenders Look At and Why?
Emma Tomsich3-Minute Read
October 24, 2020
You’ve found the home of your dreams and are ready to make it your own. But before you can make it official, you need to decide how you’re going to afford and finance the house. Obtaining a loan from a mortgage lender is the most common way to pay for property. So, whether you’re familiar with the mortgage lending process or not, I’m sure you have some questions about mortgage loans and how you can qualify for them. To make the mortgage lending process easier for you, we’ll explain what mortgage lenders look at and why.
Top 6 Factors Mortgage Lenders Consider
When applying for a mortgage loan as a home buyer, many factors are taken into consideration to determine the loan terms you will qualify for. In order to be prepared for the mortgage approval process, it’s important you’re familiar with these factors. Let’s take a look at the elements evaluated by mortgage lenders and define what each of them means so you’ll fly through the approval process.
1. Credit History
One of the most commonly known factors considered by mortgage lenders is credit history. Lenders will review your credit report to ensure that you have a healthy credit score. A credit score is a three-digit number based on the data in your credit report. It gives lenders a reasonable idea of how likely you are to repay their borrowed money.
Mortgage lenders will also dig deeper into your credit reports from the three major credit bureaus to better determine what kind of loan candidate you will be. Credit reports are made up of your credit history which will show lenders how you’ve managed past debts. Bankruptcies, foreclosures, delinquent accounts and outstanding debts are all potential red flags for mortgage lenders.
In order to qualify for a mortgage loan with a good interest rate, it’s important that you maintain good credit. You can maintain and improve your credit score by paying your bills on time, keeping your credit card balances low, managing your debts, limiting applications for new credit, keeping old credit cards open and staying updated on your credit report.
With a large purchase like a piece of property, it’s important to show lenders that you have enough income to make your mortgage payments on time. Mortgage lenders will review your tax returns for your monthly income to determine if you can make these monthly payments. If you’re a self-employed home buyer, lenders will look at your business’s adjusted gross income to determine how risky of a borrower you’ll be.
3. Employment History
In order to verify your income stability, mortgage lenders will look through your employment history. If you have any employment gaps or other signs of poor work history, your loan is more likely to have a higher interest rate.
Mortgage lenders will see you as an even safer loan candidate if they know you have assets that can be converted into cash quickly in the event of a financial setback. For example, lenders will often look at bank statements to verify a borrower has cash reserves in the event that they lose their job.
5. Existing Debt
Similarly to credit history, mortgage lenders will also look to see if you have any existing debt. For example, lenders will look at any credit card debt, car loans or student debt to determine if payments for these loans would affect a borrower making their mortgage payments. In addition, lenders will also evaluate a borrower’s debt to income ratio to compare their income and existing debt.
6. Down Payment Percentage
The amount of your down payment can determine your eligibility, as well as interest rate, for a mortgage loan. Generally, if a borrower has a large down payment, the lender will be more generous with the loan’s interest rate. The standard for a down payment is typically 20%, and paying less may require you to buy private mortgage insurance (PMI).
As you enter the mortgage approval process, you’re hopefully more prepared now that you know what factors lenders consider when evaluating your mortgage loan eligibility. Remember to keep these things in mind for the rest of your home buying journey and continue to be financially responsible to increase your chance of qualifying for better loan terms.
Your dream home is almost officially yours! To learn more about what’s ahead of you, read more about the home buying process.
Get the right home loan for you.
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