Thinking about buying a house? While idly shopping for a home is exciting, the process should begin long before any open houses and in a mortgage lender’s office to get prequalified.
Prequalifying for a mortgage gives house hunters the buying edge and serves as a good indicator to potential sellers and realtors that you are a serious buyer and have home financing arranged. It also acts as a dry run in the home financing process. While it’s nonbinding (because the information you provide has not been verified), it will give you a better idea of what you can afford.
Determining exactly what lenders look for when reviewing your home loan application is difficult to pinpoint, but ultimately, most mortgage professionals are looking for the same basic thing – your ability to repay the home loan. Below are six things most lenders review during the home loan process.
Credit activity and scores have a major impact on mortgage approvals and can influence what type of home loan and rate you will receive. The lowest rates available are reserved for borrowers with the highest credit scores. Lenders use these scores to help assess the risk being taken to provide you with home financing.
In addition to your credit score, mortgage professionals will also review your payment history – a strong indicator of your likelihood to make payments in the future. The percentage of available credit you’re using, the length of your credit history and recent efforts to get more credit can all affect your score.
You don’t need a zero balance on your credit cards to qualify for a home loan. However, the less you owe to creditors, the better. Lenders use your debt-to-income (DTI) ratio – a personal finance measure that compares the amount you earn to the amount you owe – to make sure you’ll not be over-extended with your new mortgage payment. Most lenders require a DTI of 43% or less. To calculate your DTI, add up all your monthly debt payments and divide them by your gross monthly income.
Also, keep in mind to avoid any new debt and major purchases until after you’ve closed on your home loan. Lenders re-check your credit before closing and any new debt could delay or even prevent your mortgage from closing.
In order to qualify for a mortgage, lenders need proof of income. Borrowers can be prepared with recent paystubs for the past 30 days and two most recent years of tax returns and W-2 statements. With two years of tax information, lenders can see if your income is steady, dropping or increasing.
If you’re self-employed, lenders will look at the adjusted gross income on your tax return to see if your business is making money.
The same goes for employment; not having steady work for the last two years can throw a wrench in the mortgage process. Lenders will call your current employer to verify you are still employed and to check your salary. If you’ve changed jobs during the last two years, lenders may contact your previous employers, too.
Mortgage lenders may ask for your bank and/or investment account statements for the past two months to ensure the money you claim to have is actually there. They’ll want to verify it has been there for several months and to see if you have cash reserves. Lenders may question recent large deposits as it may give the impression that the money is not yours.
Consider your down payment as an investment in your home’s equity. While there are mortgage programs that require zero down, you can often obtain better financing options with a down payment. Your rate will stay the same, but a down payment can often lower your monthly payments by alleviating mortgage insurance and, in turn, could help you afford a more expensive home.
If you put down less than 20% when you purchase a home, chances are you’ll have to pay mortgage insurance. This extra insurance ensures the lender against losses if the homeowner defaults on the mortgage.
A FHA-insured (Federal Housing Administration) loan requires a down payment minimum as little as 3.5% of the cost of the home and comes with a monthly MIP (mortgage insurance premium). Conversely, conventional home loan programs can require anywhere from 3 to 20% for the down payment minimum and may also require PMI (private mortgage insurance).
Receiving money from a friend or relative for the down payment is acceptable, but you will need a gift letter to prove that money is not a loan or from the seller. Ask your mortgage advisor for more details.
If you don’t have money for a down payment, don’t fret. Mortgage companies, such as Castle & Cooke Mortgage, offer 100% financing programs and can inform you of assistance programs you may qualify for.