—
Have you found your dream home? Are you currently looking for financing options? In this economy, buying a home without a mortgage almost feels impossible. But fortunately, getting a home loan has become comparatively easy, as long as you fulfill some specific requirements.
The main concern of a mortgage lender is that the borrower must be able to repay the loan. If you sort that out, you will find the rest of the journey smooth. So, what does a lender look for when evaluating your mortgage application? This article covers these requirements, helping you understand how to buy a house in today’s competitive market.
1. Your Credit History
The lender will not just look into your credit score. Your entire credit history is scrutinized. Your credit history will include your credit score, credit utilization ratio, and payment history.
For your mortgage to get approved, you need a good credit score, which means that it should be more than 620. A score above 670 is considered the best and improves your chances of approval. A lender also reviews the payment history on credit cards, loans, and other lines of credit to check your track record. Missed or late payments are red flags and may decrease your chances of a loan.
Along with these factors, a low credit utilization ratio also helps build trust among the lenders and helps you get a loan with lower interest rates.
2. Your Total Income and Savings
Your total income and the assets that you have under your name are another important aspect that lenders look into while approving mortgage applications. This information provides the lenders a clear picture about your ability to repay a loan and whether you can tackle financial ups and downs.
A lender looks for a steady income. They want the borrower to have a steady and predictable income. Now, while evaluating the income, the lender also looks into other sources of additional income that come from investments. Along with this, if the borrower has high-value assets, it showcases their ability to repay the loan even during situations of financial emergency.
Another important aspect is the savings documentation. Lenders usually look at the bank statements for information on checking accounts, savings accounts, retirement accounts, and other stocks and bonds.
3. Your Down Payment Amount
The down payment amount is the total amount that the borrower is planning to pay upfront. This decreases the amount of the mortgage and also improves your chances of approval. Ideally, you must aim for at least a 20% down payment on the home. A 20% down payment improves the chances of getting a loan at a low interest rate.
A down payment of less than 20% will also allow you to get a loan, but the interest rates may be higher.
4. Your Debt-to-Income Ratio
The debt-to-income ratio helps lenders get an overview of how you are doing financially. It is a number that shows how much of your income goes into paying debts every month. The ratio is calculated by dividing the total amount of your monthly debt by the total pretax income.
The ideal ratio is under 36%, which creates trust among the lenders that you are in a financially stable position. In some cases, up to 43% is also acceptable but your mortgage may be approved at a higher interest rate. A debt-to-income ratio above 43% is a warning sign, and in most cases, mortgage requests are denied.
If your DTI ratio is above 43%, there are a few ways in which you can improve it. Firstly, focus on paying back all the debt that you currently owe, especially your credit card debts, to improve your DTI ratio. Secondly, focus on increasing your income, which will help you balance out the debts.
Conclusion
Most borrowers think that a good credit score is enough to get the mortgage application approved. Yes, the credit score plays an important role, but there are several other factors that the lender looks at simultaneously.
The lenders want to be assured that you will be able to pay back the loan on time. So, they consider your entire credit history, DTI ratio, down payment amount, and income and savings.
—
