A mortgage lender is any financial institution that offers home loans. For most first-time homebuyers, mortgage lenders are synonymous with the home buying process. This is because most potential homeowners don’t have the cash on hand to purchase a home in full.
There are many different mortgage lenders to choose from. Each has its criteria and guidelines that determine whether you qualify for a loan, how much you are eligible for, and what the repayment schedule will look like.
The mortgage application process can be intimidating for any first-time homebuyer. And while you can certainly apply for a mortgage with multiple lenders, each inquiry will be reported on your credit report (more on that later).
If you’re a first-time homebuyer, chances are you’re wondering whether you’ll qualify for a mortgage loan and might be wondering, “What do mortgage lenders look at?” Contrary to what many believe, mortgage lenders look at much more than just creditworthiness; there are several criteria that mortgage lenders look at. Here’s what you need to know:
Full Credit Report
One of the most important factors mortgage lenders considers is your full credit report. Your full credit report extends beyond your credit score; it documents all your credit activity, the status of current credit cards and loans, history of repayment, and more.
Your credit report will be analyzed in detail when you apply for a mortgage. Mortgage lenders are looking for several key indicators on your credit report that give them a complete picture of what kind of borrower you are. Here are a few things they’ll keep an eye out for:
Payment History
Lenders will evaluate your payment history to ensure you have a record of on-time payments. A strong payment history portrays you as a responsible borrower. Having missed or late payments on your credit report don’t mean you won’t qualify, but you should be prepared to explain negative elements of your payment history to your prospective lender.
Hard Inquiries
Hard inquiries are company requests to review your credit report to determine whether you qualify for lines of credit and loans. Whenever you apply for a credit card, the credit card company will make a hard inquiry into your credit history.
The number of hard inquiries on your credit report can help mortgage lenders better understand your financial situation. If you’ve made several attempts to apply for credit cards within a short period of time, for example, it might create the impression that you’re cash-strapped and desperate to pull funds together.
If you have a timeline for when you plan to apply to mortgages, try to avoid making hard inquiries close to your application date. It’s important to convey to prospective lenders that you’re prepared to take on a mortgage; numerous attempts to acquire additional credit before buying a home don’t align with a preparedness narrative.
Credit Utilization
Your credit utilization is calculated by determining the percentage of credit you’ve used compared to your total available credit. Ideally, your credit utilization shouldn’t be more than 30%. Elite credit utilization hovers around the 10% mark.
High credit utilization can make you look overleveraged (too much debt). Let’s say you have a credit card with a limit of $15,000. In this case, lenders would prefer to see an available credit of $10,500.
If your credit utilization rate is high, it’s best to work down your debt before you apply (when possible). This might seem counterintuitive while you’re saving up for a downpayment on a home, but the payoff is much greater; by paying off a few thousand dollars on your credit cards, you’ll look like a much stronger applicant.
Dispute Statements
Credit disputes are statements made by consumers that challenge the validity of claims on a credit report. According to the Federal Trade Commission, 25% of consumers in the United States found errors on their credit report that negatively impacted their credit score and overall report.
Before you apply for a mortgage, you should get your free credit report and sort through each and every piece of information. This way, you’ll see your credit history just as a lender would. And more importantly, you’ll be able to address any inaccuracies you might find quickly. Disputes might include:
- Incorrectly reported accounts, such as accounts reported delinquent that aren’t
- Credit limit errors
- Account balance inaccuracies
- Identity-related mistakes, such as misspelled names or wrong addresses
- Identity-theft related errors
Keep in mind that it typically takes between 30-45 days for a credit dispute to be fixed on your credit report and, in some cases, even longer. This is why it’s important to evaluate your credit report months before you plan to apply for a mortgage.
Authorized Users
If you’re an authorized user on someone else’s account, it will appear on your credit report. The primary account holder will impact your score based on how responsibly they use their card. If you’re an authorized user for an account used irresponsibly, it can help the lender understand why your score might be disproportionate to your credit report.
Current Income
Next, your potential mortgage lender will assess your current income. Mortgage lenders want to work with borrowers who have stable income when applying and have a history of stable income. They’ll consider income from your current employer, additional income (such as working as an independent contractor, investments you’ve made, etc.).
The debt-to-income ratio is crucial during this part of the assessment. The debt-to-income ratio is an equation that compares how much you owe each month to how much money you have coming in. If your debt-to-income ratio is too high, it may indicate that your finances aren’t managed well and that you may not be in the best position to accrue additional debt.
Remember that an imbalanced debt-to-income ratio doesn’t mean you won’t be granted a mortgage; your lender will consider other criteria in combination with this factor. However, if you have high debt, you may have higher interest rates. On the other hand, if your debt-to-income ratio is disproportionately high, it’s best to work down that debt first to improve your chances of approval.
Down Payment
Next, mortgage lenders need to know how much you can put down to start. The general rule of thumb is that you should put down 20% of the home value. For example, if you’re looking to purchase a $300,000 home, ideally, you’d have $60,000 as a down payment.
This isn’t a requirement, but it helps cement your position as a reliable lender and shows that you’re committed to investment. Lenders will see that you are putting a large chunk of personal money into the home to start and, therefore, are less likely to end up in a position that compromises the investment you’ve made.
You can put down much less in some cases, particularly if you qualify for a government loan through programs like the Federal Housing Administration or the U.S. Department of Veterans Affairs.
If you cannot put down 20% of the loan, the lender might require you to apply for private mortgage insurance (PMI) to mitigate its risks. For instance, if you can only put down 10%, you might have to pay for private mortgage insurance until you acquire 20% equity in the property via mortgage payments.
Assets
Although assets don’t weigh as heavily as credit and income in terms of lending criteria, assets are considered in your application. Assets consist of bank statements (checkings and savings), certifications of deposits, stocks, bonds, retirement accounts, and other investments you’ve made.
Mortgage lenders consider your application less risky if you have several high-value assets. For example, suppose you have a significant amount of savings. In that case, your lender can see that if you lose your job or an emergency arises, you still have funds that are easily accessible and can continue making on-time mortgage payments.
Lenders consider all of your assets, so you need to be as detailed as possible in the assets portion of your application. This is especially true if your assets help cover ground that other areas of your application, such as annual income, may fall a bit short.
Conclusion
Mortgage lenders consider numerous factors before deciding whether to give you a loan. One of the most important first-time homebuyers tips to understand is that although your credit report, income, down payment, and assets all play an integral role, there is no hard and fast rule for the approval process. Every application is considered independently and evaluated on a case-by-case basis.
On the same token, if you aren’t confident in your credit score or with other elements of your credit report, this doesn’t mean you won’t be approved. You may have to pay for a PMI or end up with higher interest rates, but it’s still possible to get approved for your mortgage application with less than stellar credit scores and reports.
What Do Mortgage Lenders Look At? | Rock Mortgage — Houston, Texas
