What do mortgage lenders review?
When preparing to apply for a mortgage, many potential buyers believe nothing is more important than their credit score. While a good credit score is important, lenders will look at a buyers full financial profile before deciding whether or not to approve them for a loan.
What do lenders look for?
Lenders are concerned about the same thing – a buyers ability to pay back their loan. The following are five things mortgage lenders will review before approving you for a mortgage.
Credit activity, including your credit score, can have the biggest impact on the loan approval process. Those with a strong credit history and score can often get lower interest rates and better terms. Lenders will check your credit score and look at your payment history and existing lines of credit to determine how likely you are to make payments on time in the future.
Lenders will require proof of income before issuing a loan. They may ask for pay stubs from the last six months or tax information from the previous two years to determine if your income is steady, increasing, or decreasing. For those who are self-employed, adjusted gross income from tax returns in combination with other financial information can be used to determine income.
Potential buyers don’t need to be debt-free in order to qualify for a mortgage. However, less debt is best. Lenders will calculate your debt-to-income ratio, or DTI, to compare the amount you ow to the amount you earn. DTI limits vary by lender but are often between 40 and 50 percent. Buyers should also avoid taking on new debt before closing; lenders will re-check your credit before closing, and taking out a new loan or making a large purchase could cause delays.
Mortgage lenders will often ask to review bank and investment statements as well as review any other major assets. This is done to determine if buyers actually have the money and resources they claim. Be prepared to be questioned about any large or unusual deposits; this can give the impression that the money is not yours and you cannot afford the mortgage.
- Down payment
Down payment requirements vary by loan and can affect everything from your monthly payment to interest rates, mortgage insurance, and more. Some loans require as little as 3% down; most lenders will require PMI, or private mortgage insurance, for those putting down less than 20%. PMI is an added cost that can increase your expected monthly payment. It is possible to use money from friends or relatives for a down payment, but a gift letter is required to ensure the money is not an additional loan.