You’ve decided to buy a new home and now it’s time to apply for a mortgage loan, but what exactly will you need to qualify for a mortgage loan, and why? When mortgage lenders review your mortgage application, they will look at several factors: your credit history, debt, net worth, and also your income.
Credit Report. The credit report or credit history is the best-known part of your mortgage application. It gives the mortgage lender an overview of how you have used your credit, but it also goes much further into several specific areas.
Payment history. Here, the mortgage lender will want to see a history of on-time payments on your credit cards, loans, lines of credit, and anything else that may be included in your credit report. If you have any missed or late payments that are justifiable, you might want to prepare information that can be presented if requested.
Credit utilization ratio. This ratio indicates how much of your available credit you use at any given time. For example, if you have a credit card limit of $1000, and you are currently using $500, your credit utilization ratio is 50%. Ideally, you want to keep this ratio under 30%.
Recent applications. Your mortgage lender will review whether you have applied for other forms of credit recently. Every time you apply for credit an inquiry is made on your report. If you have too many of those at close succession, it may look like you are in financial trouble.
Major problems. These red flags could include bankruptcy claims, judgments, delinquent accounts in collections, or any other signs that make you look like a risky borrower.
Authorized user. If you are an authorized user of someone else’s credit card, this will show on your credit report. The activity of the primary holder of the credit card will be reflected on your credit report as well. Generally, this is not considered as heavily as for the accounts for which you are the primary user.
Disputes. In case there is a dispute statement or a pending dispute on your credit report, your mortgage application may be held up, until the dispute is resolved.
Debt. As a simple rule: the less you owe the better. But that doesn’t necessarily mean you can’t have any balance on your credit cards or no student loan. Your mortgage lender will also review your debt-to-income (DTI) ratio, which measures how much you owe versus your current income. On a monthly basis, they will look at your monthly debt payments divided by your gross monthly income, and make sure the ratio will still be comfortable when you add mortgage payments.
Income. You will be asked to provide proof of income, which is generally presented with the past two years of tax returns. If you are self-employed, lenders will look at the adjusted gross income on your tax return to see if your business is making money. Additional income, for example, from investments, will also be included. Mortgage lenders usually prefer to see a stable, predictable income.
Assets. Your current assets can also be considered when you are applying for a mortgage loan. A list of checking accounts, savings accounts, and investments, for example, can make you look less risky to lenders since you would be better prepared to make your mortgage payments even in the case of a job loss or emergency, for example.
Down Payment. While there are a few options that offer very low or even zero down payment, having a higher down payment can be beneficial to your mortgage loan. It will show the lender that you have been able to save a substantial amount. If you have a down payment of 20% of the value of the property or more, you will not need to pay for private mortgage insurance (PMI).
Now that you have a better understanding of what a mortgage lender will look for when approving your home loan, you can start to look for your dream home on our home search platform, where you get a cash reward of 0.5% of the value of the property when you purchase with one of our recommended real estate agents.
If you have any questions, don’t hesitate to reach out to our experienced Mortgage Bankers – they have a wide range of options to meet your financial needs and will be your best ally in making sure you get the best loan for your family!
At Resource Financial Services, we love making people’s dreams of home ownership a reality. Visit us online today at rfsmortgage.com to get started. Then contact a Resource Financial Services mortgage banker at 877.797.4545 to discuss your mortgage options and your financial goals. Let us walk you through the process and welcome you home to a better mortgage.