Some Important things lenders look for in a loan application
There is always a risk whenever banks or lenders approve someone for a mortgage for their American Dream of owning a house.
In this Covid situation, things are starting to loosen up. Banks are starting to lend again
Here are 5 things lenders look at specifically before approving your mortgage loan application.
1. Credit score.
Your FICO score tells lenders how you have managed credit in the past. Here are some things they look at specifically.
Late or missed payments on anything but the most common being on credit cards, car payments, student loans, etc. These payments are 35% of your score.
Remember late payments can stay on your credit for up to 7 years and public records such as bankruptcies or foreclosures will remain for 7 to 10 years.
(Lenders look at foreclosures specifically as you're getting into a house)
Everyone knows to pay your bills on time of course, but something that you can do that most people do not know is to pay down your credit cards right before you apply for a house so your score will increase. If you can get your credit card utilization to under 30% your score will increase, 10% or less is preferred.
Lenders like 740 or higher as these are the top tier. If your score is much lower, you're going to have trouble getting a loan if you're under 700. They still may qualify you if your in the mid 600's but you're going to pay dramatically higher than someone that has 740 in interest over the years.
2. Debt to Income below 43%
Why would a lender give you a mortgage to a house if you simply can't pay for it? A lot of people don't understand this sometimes believe it or not.
What do lenders look for?
Here is the rule of thumb: Your monthly mortgage payment can't be more than 43% of your gross monthly income. (gross means before taxes)
Example: Say you make $5000 a month, your mortgage rate can't be over $2,150 (43% of $5000)
BUT say you more expenses such as internet, electricity, car payment, etc. Say this equals $750 a month. Now your available income is $5000 - $750 = $4250.
Now your mortgage payment can't be more than $1827.50 ($4250 x .43)
Now you know!!!
3. Lenders look for judgments
(foreclosures or bankruptcies )
Your past is your past, why would a lender care so much about the bankruptcy or foreclosure that happened 6 years ago?
Because think about it from their perspective. They know you were willing to do a bankruptcy once or let one mortgage go into foreclosure there are high chances that you would be willing to do it again. There's a high chance.
4. 2-year employment history
Again, think about it from the lender's perspective. They want to make sure that your odds of you becoming jobless is not going to happen.
The longer you have been employed at your employer is better.
The rule of thumb for mortgage applications is 2 years.
It is possible for you to get a mortgage loan without this but just note that it's harder.
Your closing costs are expensive in the thousands sometimes. You'll also need a down payment. A 5% down payment on a $200,000 house is $10,000. That's not including closing costs etc.
If you can afford these upfront costs it gives lenders assurance that you have the ability to repay the loan.
Sometimes the lender will require you to have additional savings in your account and show them so just in case you lose your job you have the funds to repay back the loan.