What Do Mortgage Lenders Look For?

If you’re like most of us, you probably don’t have the cash to purchase your home outright and will therefore resort to taking out a mortgage to buy your home. So, what do you need to qualify for a mortgage and what do mortgage lenders look for when deciding whether to approve you for a home loan? We will discuss the answers to these questions in much detail below.

What Do Mortgage Lenders Look For?

When you apply for a mortgage, mortgage lenders look at several things. They look at your credit score, your credit history, your income and expenses, your down payment, your employment history, your assets, and the term of your loan. We will explain each of these in more detail below.

Although your credit score gives lenders a good picture about how you’ve handled debt in the past, it does not provide lenders with the big picture required to assess your ability to handle a mortgage. Here is what your mortgage lender will look for in your credit report.

Credit Report – What Do Mortgage Lenders Look For in Your Credit Report?

The first thing that mortgage lenders will look at is your credit report. They will first look at your credit score and will then proceed to dive deeper into how you’ve handled borrowing and repaying money in the past. Here is what they’ll look at when reviewing your credit report:

Payment History

Your payment history will be of primary concern for mortgage lenders as they will look at your track record of borrowing money and how you’ve handled repaying your debts. The better your payment history, the more likely you are to be approved for a mortgage. If you have missed payments on your credit report, your mortgage lender will ask you what caused you to miss your payments. If you have no history of missed payments, you’re in the clear.

Recent Credit Applications

Next, mortgage lenders will look at your recent credit applications. Mortgage lenders like to see few credit applications. This is so because the more recent credit applications you have, the more reliant on credit you seem, which may indicate that you’re having financial troubles. So, if you know that you’re going to apply for a mortgage in the foreseeable future, you should avoid applying for too much new credit as this will raise red flags for your mortgage lender.

Credit Utilization

Mortgage lenders will also look at your credit utilization, that is, they will look at how much of your available credit you’re utilizing. Mortgage lenders want to ensure that you haven’t racked up so much debt that you’re unable to comfortably make your mortgage payments. As a rule of thumb, mortgage lenders want to see your credit utilization below 30%. For example, if you have a $10,000 credit limit, lenders want to see that you’re not using more than 30% of your available credit, which is a balance lower than $3,000. The higher your credit utilization, the riskier you will appear to mortgage lenders. So, if you know that you’ll be applying for a mortgage in the foreseeable future, you should keep your credit utilization as low as possible, never exceeding 30% of your available credit.

Derogatory Marks

When assessing your creditworthiness, mortgage lenders will look for any derogatory marks on your credit report. Derogatory marks include missed payments, collection accounts, bankruptcies, foreclosures, repossession, and other negative events. If your mortgage lender finds any derogatory marks, you will have some explaining to do. If no derogatory marks appear on your credit report, you’re in the clear.

Income – What Do Mortgage Lenders Look For in Terms of Income?

Your income is one of the major factors that mortgage lenders will look at when determining whether to approve you for a home loan. Mortgage lenders want to lend to someone who has sufficient and stable income to comfortably make his mortgage payment. Lenders will look at your main source of income, as well as additional sources of income, such as investment income.

When assessing your ability to pay your mortgage, mortgage lenders will look at your debt to income ratio (DTI). Your debt to income ratio refers to the amount of your income and how much of your income goes to repaying your debts. This allows mortgage lenders a good picture of your ability to repay your debts as well as repaying your mortgage. If your debt to income ratio is too high, lenders may view you as over-leveraged and not able to handle additional debt, such as a mortgage.

If your DTI is too high, the mortgage lender may deny your mortgage application or approve you at a higher interest rate. So, if you foresee that you’ll be applying for a mortgage, you should try to pay down your balances so that your debt to income ratio does not result in you being denied a home loan.

When you apply for a mortgage, you should not claim that you make more than you actually do. If you overstate your income, you could land yourself in big trouble because most lenders will verify your employment and income.

Your income may be verified by requesting a copy of your most recent federal income filing, as well as directly contacting your employer to verify your income. So, don’t overstate your income and be truthful on your mortgage application.

Employment – What Do Mortgage Lenders Look For in Terms of Employment?

Mortgage lenders will look at your employment history. They want to make sure that you’re employed or have a source of income that will enable you to pay back the money you’re borrowing. Some lenders will only ask you for your current employment information, while others will ask for your employment history to assess whether you have a stable source of income. If you are unemployed for large chunks of time or are currently unemployed, your mortgage application may be denied.

Down Payment – What Do Mortgage Lenders Look For in Terms of a Down Payment?

Usually, the bigger your down payment, the more likely you are to be approved for a mortgage. If your credit score is on the low side, increasing your down payment may qualify you for a mortgage. This is so because a bigger down payment reduces the risk that the bank is taking by lending you money.

As a rule of thumb, many lenders require a down payment of at least 20% of the price of the home. For example, if you are looking to purchase a $500,000 home, you would need to make a down payment of at least $100,000. That said, there are various different types of home loans that don’t require such a large down payment.

Making a large down payment will definitely qualify you for a better interest rate, but we understand that not everyone has 20% of the cost of a home to put down. In this case, you should look at an FHA loan, which allows you to purchase a home with a down payment as low as 3.5%.

That said, the bigger your down payment, the better the interest rate you’ll be approved for. That said, you should not use all of the cash you have on hand for a down payment, you should keep a sizable amount of your money in your bank account in the event that you become unemployed so that you’ll be able to continue making payments on your mortgage.

Assets – What Do Lenders Look For in Terms of Assets?

Oftentimes lenders will consider your assets as part of the process of assessing whether to lend you money. That said, your assets don’t play as big of a role in their decision making as does your credit score and your income. Nevertheless, having assets will definitely make it easier for you to get approved for a mortgage. Assets includes things, such as real property, as well as personal property, such as a checking or savings account with money, an IRA account, and a stock account. Let’s be honest, lenders like to see that you have assets because if you default on your mortgage payments, they can recoup their loss by going after them.

Credit Score Planet Frequently Asked Questions

1. What credit score do you need for a mortgage?

The minimum credit score that you need to be approved for a mortgage is a 620 credit score. The higher your credit score, the more lenders you will find who will be willing to work with you and the lower the interest rate on your mortgage.

2. Do mortgage lenders look at bank statements?

Most lenders will ask you for two to three months of bank statements to verify your income. So, yes, mortgage lenders will ask you for and will look at your bank statements.

3. How far back do mortgage lenders look?

Mortgage lenders will look at your credit report, which typically contains credit history for the past 7 to 10 years. That said, they will focus their attention the most at your most recent years. For example, some lenders will not approve persons who have submitted more than two credit applications in the past 6 months or 3 application in the past years.

4. What should you not do when applying for a mortgage?

Here are a few things that you should avoid at all costs when applying for a mortgage:

  • Don’t quit your employment
  • Do not open new credit accounts
  • Don’t close existing accounts
  • Do not pay any of your bills late
  • Don’t rack up a ton of debt

These are some common sense things that you should not do when applying for a mortgage.