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When it comes time to take that next step in your home-buying journey, you’ll want to have a feel for the criteria that lenders use to assess mortgage applications. Planning ahead can help you pick the right lender and get approved with a competitive interest rate.
To determine your eligibility and what rate you might qualify for, lenders look at your living and employment situation, your financials, your credit history — among other factors.
Before you go any further in the process, lenders will first need a general feel for who you are and your current situation in general. They’ll assess:
A lender will want to know if you’re a permanent resident of the US. While nonresidents can still get mortgages with some lenders, it will be more difficult to get approved.
Lender want to know if you’re borrowing as an individual or jointly. If, for example, you’re taking out a home loan as a company or as the trustee, lenders require specific documentation and are likely to set different lending criteria.
Your loan officer examines your work situation to determine you have a steady source of income. The way your income is assessed depends on your type of employment.
If you’re a full-time employee — meaning you receive a regular paycheck with tax withheld — you should have a relatively easy time proving your income. However, there are a few things lenders will scrutinize:
If you work part-time, the process for proving your income will be just like a full-time employee. But you’ll need to be able to prove that you can make enough to repay the loan without working full-time.
If you’re self-employed, you won’t have regular pay stubs to show a lender. Most lenders require you to show bank statements, prior tax returns and any financial documents from your business.
The next thing lenders will want is a detailed view of your financial history, habits and overall health. To get that, they’ll look at a few different factors:
This includes money in savings accounts, investments, other properties and any other saved money. You’ll typically need to provide bank statements for the last two months.
Your liabilities include any debts including credit cards, personal loans, car loans or student loans. Your debt-to-income (DTI) ratio is one of the biggest determining factors in qualifying for a mortgage. Lenders typically look for a front-end DTI ratio of 28% or lower and a back-end DTI ratio of 36% or lower — though guidelines vary from lender to lender
Lenders typically take both ratios into consideration, though your back-end ratio is likely to carry more weight in the approval process:
Aside from your work income, lenders want information about any other income streams you have. This can include income from Social Security, rentals, investments, alimony and any other regular source of money. To verify your income and employment, lenders may request documents such as:
Lenders look at your debt repayment history to make sure you consistently pay debts on time. They’ll also assess things like your credit utilization and whether or not you’ve had any bankruptcies. Typically lenders like to see a credit score of at least 620, but the score you need depends on the type of mortgage you’re applying for.
How much you need for a down payment depends on your credit history, income and the type of loan you’re getting. If you have less than a 20% down payment, you’ll have to pay private mortgage insurance (PMI) — an insurance policy that covers your lender in the event you default.
The type of home loan and the size of the loan amount also affect your chances of being approved.
Next, lenders will want to know your occupancy status. In other words, they’ll assess whether the house will be your primary residence, secondary residence or an investment property. Banks assess the type of property you’re considering based on:
Lastly, a lender will want to know why you’re purchasing the property. The reason you’re buying your property will dictate the type of loan you’re eligible for, and often the amount you can borrow.
A lender considers your full financial status and history when determining how much you’re eligible to borrow for a home. To get the best deal on a mortgage for your dream house, compare home loan lenders and get preapproved before you start house hunting.
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