How Do Lenders Assess Your Income
Your income is a major factor when it comes to being approved for a home loan. Mortgage lenders prefer borrowers who have a stable, predictable income to those who don’t. While they look at your income from any work, additional income is included in their assessment.
Your debt-to-income ratio is also very important to mortgage lenders. It indicates how much of your monthly income goes to your debts, and gives lenders an overall sense of how you’re doing financially. If your ratio is high, it can show you’re overleveraged and possibly not in a position to take on more debt, so you might face a higher interest rate or be denied altogether.
Keep in mind that the income and employment you indicate on your application is often verified, so use accurate information. Lenders will likely view your income documentation and may even directly contact employers for verification.
Standard And Collateral Charges
A mortgage is a loan secured by property, such as a home. When you take out a mortgage, the lender registers a charge on your property. The type of charge determines which loans your lender allows you to secure against your property.
A standard charge only secures the mortgage. It doesnt secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage.
With a collateral charge mortgage, you can secure multiple loans with your lender. This includes a mortgage and a line of credit.
The charge can be registered for an amount that is higher than your actual mortgage. This allows you to borrow additional funds on top of your original mortgage in the future. You avoid paying fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
How Much Money Do You Need In Savings When Applying For A Mortgage
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You know you need enough money to cover your down payment and closing costs when buying a home. But did you also know that most lenders want to see even more dollars stowed away in your checking or saving accounts before approving you for a mortgage?
It’s true: Lenders want to know that you have enough money saved to cover at least some of your future mortgage payments should you unexpectedly suffer a financial setback. This is why it’s so important to save diligently before deciding to apply for a mortgage.
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Improving Your Cash Flow
If you’re trying to improve your odds of getting a business loan, we suggest you review the following practices of your business:
- Pay off, or delay paying, debt. If possible, pay off existing debt or refinance the debt for a longer maturity with lower payments. For other debts, try to renegotiate payment lengths. Believe it or not, some creditors may allow some delinquencies as long as some money is coming in. In some situations, you may simply have to prioritize those creditors who must be paid because they are providing necessitiessuch as utilities, certain suppliers, payroll, etc.and try to delay payments to creditors who are less likely to halt your businesslike secondary suppliers.
- Collect receivables. Try to quickly collect overdue accounts. Revenues are lost when a firm’s collection policies are not aggressive. The longer your customers’ balance remains unpaid, the less likely it is that you will receive full payment.
- Increase revenues. While this suggestion is an obvious goal of every business, a poor cash flow may indicate that you need to seriously reconsider what steps you can take to increase sales revenues by either raising sales volume and/or altering prices. In reviewing ways to increase cash flow through increased sales, guard against allowing too many credit purchases. Extending credit will increase your accounts receivable, not your cash.
- Reduce inventory. If you can reduce the amount of inventory you maintain, your cash outflow should decrease.
Why Do Mortgage Companies Look At Bank Statements
It helps to be prepared and understand why mortgage companies look at bank statements and what transactions may raise questions. Before applying for a loan, we recommend reviewing your recent bank statements and asking yourself these six questions. If potential issues come up, you may need to explain what youve done to address them.
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Closing A Credit Card Account
If youre mired in credit card debt, you might think that closing an account will improve your credit score. But thats not necessarily true.
There are certain situations where shutting down a credit card account might be a smart move. If you need a mortgage, however, it wont do you any good. By getting rid of a credit card and reducing your level of available credit, your debt-to-credit ratio could skyrocket. And as a result, your credit score could sink.
Tip : Keep Business Expenses Separate
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.
Which Mortgage Lenders Ask For Bank Statements
A lot of banks ask you to submit your statements for assessment, but not every lender will need you to.
For example, mainstream mortgage lenders Halifax and Santander have recently confirmed that they do not ask to see bank statements as part of standard mortgage applications. However, they stipulate that they have a number of other tools to assess a customers creditworthiness.
What Is A Mortgage
When you buy a home, you may only be able to pay for part of the purchase price. The amount you pay is a down payment. To cover the remaining costs of the home purchase, you may need help from a lender. The loan you get from a lender to help pay for your home is a mortgage.
A mortgage is a legal contract between you and your lender. It specifies the details of your loan and its secured on a property, like a house or a condo.
With a secured loan, the lender has a legal right to take your property. They can do so if you dont respect the conditions of your mortgage. This includes paying on time and maintaining your home.
Unlike most types of loans, with a mortgage:
- your loan is secured by a property
- you may have a balance owing at the end of your contract
- you normally need to renew your contract multiple times until you finish paying your balance in full
- you may have to meet qualification requirements including passing a stress test
- you need a down payment
- you may need to break your contract and pay a penalty
- your loan is typically for an amount in the hundreds of thousands of dollars
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Lenders Look At More Than Just Your Credit Score
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If you’re in the market for a loan, your credit score is one of the biggest factors that lenders consider, but it’s just the start.
Lenders like to see an applicant’s full financial profile when deciding whether to approve a loan and when setting the interest rate. So when you fill out a loan application, be prepared to share more than just your credit score.
How Do Lenders Check I Can Afford A Mortgage
Lenders will work out your household income including your basic salary and any other income you receive from a second job, freelancing, benefits, commission or bonuses.
Checking affordability is a much more detailed process. Lenders take all your regular household bills and spending into account, along with any debts such as loans and credit cards, to make sure you have enough left to cover the monthly mortgage repayments.
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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 there’s an issue with the valuation, the lender’s 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.
- Find out more: mortgage lender reviews
Why You Should Speak To A Whole
Weve helped over 120,000 find the right mortgage by introducing them to a broker, even those who may have been declined a mortgage or have a bad credit history.
In fact, our customers consistently rate us 5 stars on Feefo, mainly due to our high levels of service, but also because we offer a 5-star service with access to expert brokers who are:
- Whole of market.
- Have a working relationship with all mortgage lenders, not just a select few.
- Already know the lenders to go to as they successfully arrange these already.
- OMA Accredited advisors.
- Have completed a 12 module LIBF accredited training course
- Are experts on the subject of mortgages and bank statements
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Dont Apply With Too Many Lenders At Once
Dont put all your eggs in one basket, right?
Its important to compare lenders, but submitting applications to several lenders will show up on your credit report. While it wont have a massive impact on your credit rating, it is frowned upon by lenders and it just doesnt look very good especially if youve already been denied for a loan multiple times.
Its a much better idea to compare all your options first, then apply for a loan once youve identified the right one for your needs.
Making A Mortgage Appointment
A mortgage advisor may be able to offer recommendations on the right mortgage for you.
To find a mortgage thats suited to your needs, a mortgage advisor will look at your:
- Your personal circumstances, needs and preferences
There are several ways you can book a mortgage appointment, including:
- At your bank Most banks or building societies will have their own team of mortgage advisors.
- Over the phone Many independent advisors are contactable by phone.
- Via email If youre short on time, drop your chosen advisor an email with a few of your concerns and they should be able to help.
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What Documents Will I Need To Provide
Mortgage loan officers will want to understand the self-employed borrowers business, their expertise in their chosen field and their ability to earn a stable, consistent and ongoing income for at least the next 3 years.
While underwriting standards will vary based on the lender and the type of loan youre getting, the same types of documents are likely to be required. Heres an overview of some of the common documentation used across the industry:
- Current statement of bond insurance
- A letter from your licensed CPA, enrolled agent or tax preparer
- Letters from clients indicating service has been performed
- A membership letter from a professional organization that can verify through your membership at least 2 years of self-employment.
- Any state license and business license that may be required in your profession.
- Evidence of workers compensation and employers liability insurance.
- A DBA issued at least 2 years ago. If youre using a DBA for verification, you must prove current self-employment with 2 months of recent business account statements, creditor statements or company invoices.
- At least 1 year of both your business and personal tax returns, for income documentation purposes, and W-2s, if your business is incorporated.
- A year-to-date profit and Loss statement, preferably audited by a CPA. Unaudited statements may require most recent business bank statements as well.
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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Get A Credit Strong Credit Builder Loan
One of the best ways to build payment history is to get a Credit Strong credit builder account. Credit Strong is part of an FDIC insured bank and offers credit builder loans. Credit builder loans are special types of loan accounts that build credit easily.
When you apply for a loan from Credit Strong, you can select the term of the loan and the amount of the monthly payment. Credit Strong does not immediately release the funds to you. Instead, the company places the money in a savings account for you.
As you make your monthly payments, it improves your credit by building your payment history. Credit Strong will report your payments to each credit bureau.
When you finish paying off the loan, Credit Strong will give you access to the savings account it established for you, making the program a sort of forced savings plan that also helps you build credit.
Ultimately, with interest and fees, youll pay a bit more for the loan than youll get back at the end, but this can still be a solid option for a borrower who wants to improve their credit while building savings.
Unlike some other credit builder loan providers, Credit Strong is highly flexible, letting you choose from a variety of payment plans. You can also cancel your plan at any time so you wont damage your credit by missing payments if you fall on hard times.
See the credit builder loan pricing and plans here.
How Your Bank Statements Can Cause Your Application To Be Declined
Some people want to know how closely mortgage lenders look at bank statements, and what might ring warning bells. If your lender is not satisfied with any of the factors mentioned in the section above, that may inhibit your likelihood of being accepted for a mortgage.
Other impacting factors include:
- Untraceable cash deposits: These are a big no-no for most lenders due to the risks of money laundering.
- Employer-gifted deposits: Again, due to the risks of fraudulent activity.
- Funds from overseas savings: It can be harder for providers to trace the origin of overseas savings, although some can be more flexible.
- Gambling funds: While its possible to use gambling winning for a mortgage deposit, regular evidence of gambling on your bank statements will likely be treated with more suspicion.
- Payday loans: It can be much more difficult to get a mortgage after a payday loan, even if theyve already been paid off. Evidence of other forms of unsecured borrowing are also risky, but some providers can be more flexible.
If youre worried that any of the above issues may harm your chances of being mortgage approval, dont hesitate to get in touch. Well refer you to one of the expert brokers we work with, ensuring that they have the right specialist expertise to help you further.