What Will Mortgage Lenders Consider When They Evaluate Your Application?

Applying for a mortgage can feel overwhelming – especially if you don’t know what lenders look for. These are the factors they will consider when deciding whether to give you a loan.

Do You Have Sufficient, Stable Income?

A lender wants to know if you have enough money coming in every month to cover loan payments, in addition to your other bills. You’ll have to submit W2s, 1099s, pay stubs, or tax returns showing your income.

Your mortgage lender isn’t just interested in how much money you make. The company will want to know how long you’ve had your current job and whether you will continue to have that source of income for the foreseeable future.

If you’re self-employed, or if most of your income is from commissions, the amount you earn can vary from month to month. In that case, a lender will use your average monthly income.

What Debts Do You Currently Have?

A mortgage lender will consider your credit card balances, auto and student loans, and other obligations, such as child support or alimony. It will calculate your debt-to-income ratio, or the percentage of your monthly gross income that goes toward debt payments, to figure out if you would be able to avoid those bills, plus the cost of a mortgage.

Do You Have Significant Savings and Investments?

You’ll need enough money to cover a down payment and closing costs, plus some left over to deal with a financial setback. For example, your new house might need repairs, you might lose your job, or you might have to take time off to recover from an illness or care for a family member.

A lender will want to be confident that you’ll be able to keep up with your mortgage payments if something like that happens. You’ll have to provide documents showing how much money you have in checking and/or savings accounts, certificates of deposit, and retirement accounts.

If you have made any large deposits recently, expect a lender to ask questions. It’s fine to use money from family or friends to help pay for a down payment, but a lender will request a letter stating that the money is a gift, not a loan that you will have to pay back.

Do You Have Good Credit?

A lender will check your credit to find out if you have a history of managing money responsibly. When it comes to minimum credit scores, each company has its own guidelines. If one lender denies your application, another might approve you for a loan.

Your credit score can affect your interest rate. This is why it pays to shop around. Even a small difference in your interest rate can save you tens of thousands of dollars over the life of the loan.

How Much Is the Property Worth?

Before a lender gives you a mortgage, it will want to be sure that the amount you’re requesting is less than or equal to the value of the house. You will have to get an appraisal, which is an independent assessment of a property’s value.

An appraiser will consider the house’s size, condition, and location. The appraiser will also look at how much comparable properties in the area have sold for recently.

What Is the Loan-to-Value Ratio?

Your loan-to-value ratio will be the percentage of a house’s value that you borrow. The higher your down payment, the lower your LTV ratio.

A large down payment will make a lender perceive you as less risky because you’ll be financially invested in the house and will have manageable monthly payments. If, on the other hand, you put little or no money down, a lender will consider you a riskier borrower. You might be able to get a mortgage, but it will probably have a higher interest rate.

Where Can You Learn More about the Homebuying Process?

Buying a house is probably the biggest financial move you’ll ever make. Understanding how things work can make the process less intimidating.

In the First-Time Homebuyer Masterclass, you’ll learn how to choose the right house, why you have to consider a lot more than just monthly loan payments, and how to avoid common mistakes. Enroll now.

Please share this blog on social media and/or send it to someone you know who is thinking about buying a house this year.