by Larry Alton, May 20, 2015 – The Bigger Pockets Blog
What Mortgage Lenders Look For When You Apply For A Loan
At some point, everyone dreams of being a homeowner. It’s a beautiful goal, but the process of getting there isn’t quite as pretty, especially when it comes to applying for a mortgage. Some lenders can be so picky that it seems impossible to qualify. Fortunately, the process is simplified when you know what lenders want.
1. Credit History
Lenders must be sure that you have a history of making all of your payments before they give you such a large line of credit. They’ll assess your payment history, debt-to-income ratio, and the age of your credit history.
To make sure each of these areas is in great shape, set a goal to make all of your payments as close to on time as possible, pay off as much of your debt as you can before applying, and don’t open a new account about the same time you’re looking to take out a mortgage. Though most of these things look better if you start doing them early, it’s never too late to begin correcting a poor credit history.
2. Current Bank Statements
Lenders check your current balance to be sure you have sufficient funds available for a down payment. If you do not, they will dig deeper into the matter to determine whether or not the money for the down payment is in place.
They also generally ask for the last few months of statements to ensure that you have had the money saved in your account for a couple of months, and it wasn’t magically deposited there right before you asked for the loan. Lenders like to see that you have been saving responsibly for the home.
3. Employment Verification
Lenders need to know that you have stable income, and the best way to verify a steady paycheck is to check your employment history. They’ll look at two years’ worth of tax returns to determine if you can hold a job and make enough money to keep up with your payments.
For self employed or freelance workers, make sure that your business funding is well organized and documented. You’ll likely be required to jump through a few more hoops as well, so if you’re looking for a great reference on getting a mortgage when you’re self-employed, click here.
In essence, collateral refers to the assets you must turn over to the lender if you fail to pay your mortgage. The collateral in this case is the home you’re purchasing. The bank will determine the worth of the home, just in case the loan doesn’t work out for both parties. They’ll appraise the house, and if they deem it worth seizing, they will be more liberal with their loan amount. If not, they’ll be hesitant to grant you the amount necessary.
Unfortunately, you don’t have a lot of control over this aspect of the approval process. Since the real estate market crash of 2008, banks are much pickier about the kinds of homes they’re willing to finance, and it’s hard to tell what homes they’ll back.
The mortgage process can be nerve racking, especially if you aren’t sure your credit history is in line with what banks want. BiggerPockets can serve as your one-stop resource center for everything you need to know about the current housing market, how to shop for homes wisely, and how to work with your bank.