Lenders look for a number of things when assessing your qualifications for a mortgage (Hint: You don’t have to be perfect).
For many home buyers, the prospect of meeting a mortgage lender is at least a little bit scary. Many people seem to think lenders are looking for reasons to turn them down.
In fact, lenders are looking for ways to help you get a mortgage. If you work with a lender before you decide on a home, you will know whether you’ll qualify for a mortgage large enough to finance your home. Here's an idea of what lenders consider when they decide how large a loan you can qualify for—in three broad categories.
Your household income and expenses
Lenders look at your income in several different ways—starting with the total amount. But how you earn it is also important. For example, income from bonuses, commissions and overtime can vary greatly from year to year. If these sources make up a large percentage of your income, your lender will want to know how reliable they are.
Your lender will also consider the relationship between your income and expenses. Generally, experience suggests that your fixed housing expenses (mortgage payment, insurance and property taxes, but not repairs or maintenance) should not be more than around 28% of your gross monthly income, although this is not a hard and fast rule. Your lender may also consider other long-term debts, such as car loans or college loans.
It may seem that your lender needs to know everything about you for the application, but actually all your mortgage lender needs to know about you is your employment and finances, and information about the home you’re buying. However, you will need to provide quite a few details about these topics, and your application process will go much more smoothly if you’re prepared. Be sure to ask your mortgage lender what information you’ll need to complete your application. In general, it is a good idea to bring the following when you meet with your lender:
Employment and Income Information
Your employment, salary and bonuses, and any other source of income for the past two years (bring your most recent pay stub, previous year’s W-2 forms and tax returns if possible)
The most recent account statement showing the amount of any dividend and interest income you received during the last two years
Official documentation to support the amount of any other regular income you may receive (alimony, child support, etc.)
Personal Assets Information
Current balances and recent statements for any bank accounts, including both checking and savings
Most recent account statement showing current market value of any investments you may have such as stocks, bonds or certificates of deposit
Documentation showing interest in retirement funds, if any
Face amount and cash value of life insurance policies, if any
Value of any significant pieces of personal property, including automobiles
Credit and Debt Information
The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you may have
The idea is to arrive at a monthly payment you can afford without creating financial hardships.
Down Payment
In the past, lenders expected home buyers to make a down payment of up to 20% of the asking price of their home. However, as the average price of homes has gone up, lenders have found ways to lower the required down payment, in some cases, to 10%—so you do have options if you can’t afford such a large down payment.
Borrower History
When deciding whether to give you a loan, lenders must determine that you will be able and willing to repay the mortgage debt. To ensure that you will be able to pay off the debt, lenders may look at many factors, including:
Your employment history
Your income and outstanding debt
Your savings patterns and amount of savings
The type and amount of loan you are requesting
The amount of down payment you plan to make or the equity that you have
To ensure that you will be willing to pay off the debt, lenders typically look at your credit history and credit score. Your credit score predicts how likely you are to repay the mortgage debt.
What is a credit score? A credit score is a number that indicates statistically how likely a borrower is to repay future debts.
If you have had credit problems, be prepared to discuss them honestly and come to your application meeting with a written explanation. Every lender knows there can be unavoidable reasons for credit lapses, such as unemployment, illness or other financial strains. If you have had a problem but have worked with your creditors to correct it, and your payments have been on time for a year or more, you’ll probably have nothing to worry about.
Most people don’t need to worry about the effects of their credit history. However, you can be better prepared if you get a copy of your credit report to review before your meeting. That way, if there are any errors, you can take steps to correct them before you make your application.
