Thursday, September 22, 2022

What Banks Look At When Applying For A Mortgage

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The weight given to a lender’s assessment of a borrower’s character can vary tremendously between lending institutions and between individual lending officers. Many small businesses have found more success “selling” their reputation and good character to smaller community banks who may be more directly affected by the economic health of the surrounding community.

To ensure you’re selling yourself well to your lender, we’ve compiled the most important steps to follow.

What Is A Mortgage Preapproval

When youre shopping for a mortgage, you can compare options offered by different lenders.

Mortgage lenders have a process which may allow you to:

  • know the maximum amount of a mortgage you could qualify for
  • estimate your mortgage payments
  • lock in an interest rate for 60 to 130 days, depending on the lender

The mortgage preapproval process may be divided in various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.

During this process, the lender looks at your finances to find out the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents and they likely run a credit check.

This process does not guarantee your approval for a mortgage.

Do You Qualify For A Mortgage Loan

Bank statements are just one of many factors lenders look at when you apply for a mortgage.

Almost all areas of your personal finances will be under scrutiny including your credit score and report, your existing debts, and any source of income youll use to qualify for the loan.

These factors help determine how much house you can afford, your loan amount, and your interest rate. The cleaner your financial situation looks across the board, the better deal youre likely to get on your new home loan or refinance.

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What Documents Do I Need To Present To The Bank To Apply For A Mortgage As A First

Most lenders look for information about your income, employment, living costs and existing loan repayments to help them decide whether you can afford to repay a loan.

If you are a PAYE employee, you will typically need to provide:

  • Your last three months payslips
  • The last six months bank account statements .

If you are self-employed:

  • Your last two years certified/audited accounts
  • The last six months business bank account statements .

You may also be required to provide identification documents and confirmation of your address. This is usually a current valid passport or driving licence and recent utility bill.

You may need to provide your last years Employee Detail Summary from Revenue.ie if you are relying on variable income to support your mortgage application

If your application is approved in principle, the following are examples of documents that you will also be asked to provide:

  • PAYE applicants: a Certificate of Income .
  • Self-employed: your accountants or auditors written confirmation that your personal/business tax affairs are up to date, and your management figures for the current trading year.

How Do You Know Its Time

What Do Banks Look For In A Loan Application

When is a good time to buy a home and take out a mortgage? A good time is when youre personally and financially ready. That means you have a steady job, youre settled in your personal life, and youre committed to staying put in the same place for the next five or 10 years.

Read: Should You Rent or Buy?

When applying for a mortgage, the lender wants to make sure you can afford it on a monthly basis. The lender does this with two debt ratios: the Gross Debt Service Ratio and the Total Debt Service Ratio.

The GDS Ratio looks at the percentage of your gross monthly income needed to cover expenses related to the home: your mortgage payments, property taxes, heating and maintenance fees . Most lenders are looking for a GDS Ratio below 39%.

The TDS Ratio is similar to the GDS Ratio. It looks at all the same things as the GDS Ratio, however, it also factors in any other debt that you might have. If its revolving debt, such as credit card debt or a line of credit, 3% of the outstanding balance is usually used for debt servicing purposes. If its an installment loan with a fixed payment , the payment is used for debt servicing purposes. Most lenders are looking for a TDS Ratio below 44%.

It should be noted that the mortgage payments used in these calculations are higher than youre actually paying. Thats because the payments are calculated using the inflated stress test rate .

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Wait For Your Formal Mortgage Offer

If a lender is happy with your application, it will make you a formal mortgage offer. Mortgage offers are usually valid for six months, whereas remortgage offers are typically only valid for three months .

Generally, you should expect to receive your mortgage offer within four weeks of applying.

The process could take longer if theres an issue with the valuation, the lenders processing centre is busier than usual, additional information or documents are needed, or if your application is particularly complicated.

Once you have a formal mortgage offer, your conveyancer will arrange for the mortgage funds to be transferred from your mortgage lender to the person you are buying the property from on the day of completion.

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Staying Within Your Budget

To qualify for a mortgage, you have to prove to your lender that you can afford the amount youre asking for.

Mortgage lenders and mortgage brokers use your financial information to calculate your monthly housing costs and total debt load. They use this information to determine what you can afford.

Lenders and brokers consider information such as:

  • your income
  • your expenses
  • the amount youre borrowing
  • your debts
  • any other debts

What Do Lenders Require For A Down Payment

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The rule of thumb is to try to save at least enough to make a 20% down payment on a home. A down payment of this size will get you closer to the best loan interest rates, but some conventional loans have much lower down payment requirements.

Depending on your situation, you may be eligible for a government-backed loan that allows you to put down very little. For example, a mortgage loan through the U.S. Department of Veterans Affairs requires nothing down, and loans through the Federal Housing Administration permit as little as 3.5% down.

However, the higher the loan-to-value ratio on your loan, the more risk you’re asking a lender to take on. For example, if the LTV is 90%, it means the lender is financing 90% of the home’s appraised value, while you, as the buyer, are putting down 10%. When the LTV is high, the lender is taking on a high proportion of the debt, and might require you to have private mortgage insurance to offset its risk.

If you take out a conventional loan and put down less than 20%, you’ll probably get stuck with a higher interest rate, and you’ll likely be required to pay PMI until you reach 20% equity. With an FHA loan, you often have to pay mortgage insurance for the life of the loan.

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Why Is It Important To Get Pre

Getting pre-approved for a mortgage gives a person bargaining power since they have mortgage financing already lined up and can therefore make an offer to the seller of a home in which they are interested. Otherwise the prospective buyer would have to go out and apply for a mortgage before making an offer and potentially lose the opportunity to bid on a home.

A Bank Vod Wont Solve All Bank Statement Issues

Verifications of Deposit, or VODs, are forms that lenders can use in lieu of bank statements. You sign an authorization allowing your banking institution to hand-complete the form, which indicates the account owner and its current balance.

VODs have been used to get around bank statement rules for years. But dont count on them to solve the above-mentioned issues.

First, the lender can request an actual bank statement and disregard the VOD, if it suspects potential issues.

Second, depositories are also required to list the accounts average balance. Thats likely to expose recent large deposits.

For instance, if the current balance is $10,000 and the two-month average balance is $2,000, there was probably a very recent and substantial deposit.

In addition, theres a field in which the bank is asked to include any additional information which may be of assistance in determination of creditworthiness.

Thats where your NSFs might be listed.

There are good reasons to double-check your bank statements and your application before sending them to your lender. The bottom line is that you dont just want to be honest you want to avoid appearing dishonest.

Your lender wont turn a blind eye to anything it finds suspicious.

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How Your Mortgage Payments Are Calculated

Mortgage lenders use factors to determine your regular payment amount. When you make a mortgage payment, your money goes toward the interest and principal. The principal is the amount you borrowed from the lender to cover the cost of your home purchase. The interest is the fee you pay the lender for the loan. If you agree to optional mortgage insurance, the lender adds the insurance charges to your mortgage payment.

Tip : Keep Business Expenses Separate

What Do Banks Really Look For In Your Loan Application?

If you charge business purchases, such as a new computer or office supplies, to your personal card, youll increase your credit utilization and that could have a negative effect on your application.

Keep separate accounts and credit cards for business and personal expenses to craft a favorable and more truthful financial profile on your application.

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What If I Have Bad Credit

Most mortgage lenders will want you to have an acceptable credit score before theyll be willing to offer you a mortgage. But there are specialist mortgage lenders who will consider you with a very low or even no credit score if you’ve not managed to build a credit history yet.

If you need a mortgage but are worried about your credit score, the door of your dream home isnt necessarily closed to you. Youll probably just need a specialist mortgage broker to get you the right mortgage. Get matched to your perfect mortgage broker by making an enquiry.

Improving Your Character In Front Of Lenders

As a general rule, the following traits are considered the most important when a bank considers your character:

  • Successful prior business experience
  • An existing or past relationship with the lender
  • Referrals by respected community members
  • References from professionals who have reviewed your proposals
  • Community involvement
  • Evidence of your care and effort in the business planning process

Many banks consider the amount of investment the owners themselves are committing to the business as evidence of a borrower’s “character.” On top of that, many commercial lenders want the owner to finance between 25 percent to 50 percent of the projected cost of a startup business or new project. If your investment is considered insignificant, a lender may consider it a lack of both owner confidence and dedication to the business.

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Why Do Mortgage Lenders Need Bank Statements

If youre on your companys payroll, youll probably need to provide your lender with recent pay stubs and W-2s. If youre self-employed, youll need to submit your tax returns as well as any other documents the lender requests.

So, if they already have all of that information, why do mortgage lenders need to look at your bank statements? In general, your lender needs to verify that you have enough money coming in to make your monthly payments and that you have enough money in your account to cover a down payment. Your lender will also want to see that you have at least a few months worth of mortgage payments available. Theyll likely check any and all of your bank accounts during this process.

Your lender is also checking your bank statements to be sure that your assets are sourced and seasoned.Sourced means that the lender knows where your money is coming from. Seasoned means that all funds have been in your account for a while they werent just dropped there suddenly. Both sourcing and seasoning help prevent fraud and money laundering and also assure your lender that you arent using a loan for your down payment.

Finally, your lender uses your bank statements to see whether you have enough money in your account to cover closing costs. Closing costs typically range between 2% 5% of the total cost of your loan. Your mortgage company will also look at your liquid cash to make sure you didnt forget to set aside money to finalize your loan.

What Mortgage Lenders Accept Sa302s

Bank Statement Loans and How to Qualify

Mortgage lenders all have their own lending criteria, that can differ from lender to lender. So its always a good idea to check with your lender or your mortgage broker to see what youll need if youre self-employed.

  • a copy of your tax calculation printed from your HMRC online account

  • a tax calculation printed from commercial software used to submit returns

Theyll also need a tax year overview, which you can print from your HMRC online account.

The lenders on this list have agreed to accept tax calculations and tax year overviews that customers, or their agents or accountants, have printed themselves.

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Hold Off On Any Career Changes

Lenders want to see that you can hold down a job. Unless you have $500k hidden away , its generally your income that will be used to make loan repayments.

Generally speaking, most lenders like it if youve been with the same employer for a minimum of six months, not including probation periods.

But if youve just started a new job, don’t panic yet. In that case, lenders will look at what you did for a crust immediately before your current role. It’s usually enough if you’ve been in a similar role in the same industry for many years, or at least for the past two.

If you’re a casual job hopper, the news isn’t so great. Most lenders will see you as a wildcard.

Additional Documentation Requests To Expect

Depending upon the specific type of loan you are seeking, you should also address certain issues germane to that loan type.

For instance, if money is requested for working capital, your documentation should include:

  • The amount that will be used for accounts payable, along with an accounts receivable aging report to disclose the current amounts overdue 30 to 60 days or older
  • The amounts that will be used for inventory and any increase in the number of days that inventory on hand will be held
  • The amount your cash balances will be increased
  • A contingency amount that is equal to at least 10 percent but preferably 25 percent.

If money is needed for machinery or equipment, include information that addresses:

  • Whether the assets will be immediately available or if a delay is anticipated
  • The price of the assets and how installation will be performed
  • Whether installation will interfere with current production and the cost of any interruptions

Documentation for an acquisition of land financing should include the real estate’s cost, location and size, intended use, and whether any of the land is for future expansion.

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How Can Mortgage Success Help

It is our job to know how lenders will assess your application prior to applying. As part of that process, we will also check affordability in the same way as the lender we apply to, so there is no reason for there to be any issues down the line.

Our job is to package your application for the lender in a way that helps to speed the process up, prevent mistakes and give you the best possibility of acceptance.

What mortgage lenders do look for on Bank Statements is how you manage your finances and that your income being deposited into you account is what you put on the application, the odd bottle of wine from Bargain Booze, Smashed Avocado on Toast or UberEats are not the red flags the media makes them out to be.

Past Behavior Is The Biggest Predictor Of Future Results

What Do Banks Look At When Applying For A Home Loan?

Just because a loan met credit score and DTI requirements did not mean the loan was automatically approved. My job was to act as the banks last line of defense against bad borrowers and bad applications.

My active time approving loans was in 2007, at the very start of what would turn out to be the nations second worst economic crisis in history. The Great Recession proved why loan application rules are so important. They were not just to protect the bank from losses, they were to protect borrowers from entering into financial agreements they could not afford or were not in their best interest.

How did we make this judgement? Ultimately it did come back to the credit report, but not the credit score. My boss and trainer at the bank told me that past behavior is the biggest predictor of future results. If someone had a history of missed and late payments, they would probably keep doing that in the future. If they had a history of on-time payments, they would probably keep doing that in the future. By finding a trend and a pattern, I would best predict how a loan would turn out.

Keep this in mind every month when you get bills in the mail. A late credit card payment may not seem like a big deal today, but that late payment will still be on your credit report six years from now. That small decision six years ago could be what disqualifies you from a buying a home or getting the best possible rates.

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