Factors Lenders Look At When Considering Your Loan Application
by Kailey Hagen | Updated July 21, 2021 – First published on Jan. 10, 2020
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You want to put your best foot forward when applying for a mortgage, auto loan, or personal loan, but this can be difficult to do when you’re not sure what your lender is looking for. You may know that they usually look at your credit score, but that’s not the only factor that banks and other financial institutions consider when deciding whether to work with you. Here are seven that you should be aware of.
Can You Receive Money For A Down Payment From A Friend Or Relative
Lenders generally allow homebuyers to receive gift money from loved ones for their down payment. Under Fannie Mae and Freddie Macs requirements, these gifts can only come from a family member related by blood, marriage, adoption, or legal guardianship. The gift may also come from a fiancé or domestic partner.
If you receive your down payment money as a gift, youll also have to provide a gift letter written by the donor. The gift letter should specify the dollar amount of the gift, the date, and confirmation that the gift isnt a loan and no repayment is expected.
Avoid Delays Fill Out The Application Form Correctly
Here are our top five tips for filling in the paperwork or online application. Even if you end up getting a broker to help you, its normal for you to be asked to check it first so make sure you:
DO state your income exactly. Dont round up.
DO give your FULL NAME even middle names are necessary.
DO declare ALL your debts.The lender will find them anyway and withholding the info can mean a quick decline.
DO get your three-year address history exactly right, including postcodes.
DO give honest answers when asked about how much you spend.
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Key Factors When Seeking A Loan Approval
Eight out of 10 first-time buyers refused mortgage
GETTING approved for a mortgage is not easy. The level of information required is vast and the whole process is very time-consuming.
This means that it is a process that should only be undertaken by those people who are well organised, advises Ciaran Phelan, the chief executive of the Irish Brokers’ Association.
“The level of information required is vast. Be prepared to put some time into the process,” he says.
“And be as organised as you can possibly be – banks will look for documents and data, and they may ask you or your broker to resend this information, or if time lapses, to send updated bank account statements etc.”
Mr Phelan’s top tip is to open a mortgage file/folder that you can refer to as these requests roll in.
This may make the process easier for you, possibly less stressful and it may keep the time it takes to get the application submitted and hopefully approved to a minimum.
There are a myriad of considerations the bank will take into account when deciding whether or not a candidate will get approval.
Here he outlines what it takes to get loan approval, by setting out key factors that will determine if you are granted a mortgage.
1. Job security
A bank will look into what you do, where you work, and how long you’ve been in your current employment.
Income is not always just salary – banks will look at regular bonuses and possibly money you are receiving from other sources on a regular basis.
Can I Get Mortgage Pre
Its unlikely. Initial qualification without a full credit check may be possible with some lenders at that point, they may be interested simply in whether you have both the income to pay back a mortgage and no credit red flags. But to get full-scale pre-approval will likely require a credit check.
Its important to know how long pre-qualification and pre-approval will be in effect. Different lenders assign different times for which their letters of pre-qualification or pre-approval are good, from 30 to as many as 120 days.
Remember that multiple checks for credit history can negatively affect your credit rating, so you dont want to have them repeated often. For the same reason, you shouldnt apply for it until youre ready to start seriously home shopping. Many lenders and real estate agents can help you get a range of what you can afford in a general sense, so that you can avoid going through the pre-qualification or pre-approval process only to learn that theres nothing in your market that you can realistically afford or want.
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What Are The Chances Of Getting Denied A Mortgage After Pre
If youve stayed within your budget, not high, but it does happen. Remember that pre-approval is a statement that you are considered generally qualified to pay back a mortgage, whereas the actual mortgage approval is on a specific purchase. The lender may believe that you are paying too much or may have uncovered liabilities that they did not find in the pre-approval. Also, if you are not able to pay a certain percentage of the cost in a down payment, typically 20 percent, then you may have to purchase mortgage insurance, which increases your costs.
You dont have to stay with the lender that gave you pre-approval, so you can consider applying elsewhere, which is a good idea in any case.
When And Where To Apply For Your Mortgage
You can meet with a mortgage lender and get pre-qualified at any time. A pre-qual simply means the lender thinks that, based on your credit score, income, and other factors, you should be able to get approved for a mortgage. Its informal and totally non-binding.
As you get closer to buying a home youll want to seek pre-approval. You can meet with a local bank, credit union, or mortgage broker. Or you can even get pre-approved online from any number of national online mortgage lenders.
Wherever you go, this pre-approval isnt binding, but its a formal indicator of your ability to get approved for a mortgage. Most sellers will want to see a pre-approval within a couple days of receiving your offer.
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Delink From Ex Partners Or Flatmates To Stop Their Credit History Wrecking Your Chances
If you’re financially linked to someone else but you’re now separated or have nothing to do with them, then de-link yourself.
If not, any late payments or misdemeanour they’ve committed will reflect badly on you. Write to the credit agencies and ask for a notice of ‘disassociation’.
You could still be linked to old flatmates if you had a joint bank account for bills, so it’s worth checking that their credit history isn’t affecting yours. If it is, de-link yourself quickly.
Even if the person you’re linked to has a good history now, you still risk problems in future if they miss payments. The guide has full details of what to do.
Tips To Get Approved For A Mortgage
If youâre looking to dive into homeownership, itâs important to be prepared at every step. Besides tracking interest rates and hunting for the perfect home, applying for a mortgage is the biggest step in the process. While it might seem stressful, it can be made much easier if you get your financial affairs in order ahead of time. Here are 7 ways to help get your mortgage application approved.
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What To Provide To Your Lender Or Mortgage Broker
Before preapproving you, a lender or mortgage broker will look at:
- your assets
- your income
Youll need to provide the following:
- proof you can pay for the down payment and closing costs
- information about your other assets, such as a car, cottage or boat
- information about your debts or financial obligations
For proof of employment, you may have to provide:
- a proof of your current salary or hourly pay rate (for example, a recent pay stub
- your position and length of time with the employer
- notices of assessment from the Canada Revenue Agency for the past 2 years, if youre self-employed
Your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments. This will help them determine if you have the down payment.
Your debts or financial obligations may include your monthly payments for:
What Do Lenders Require For A Down Payment
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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How Can I Increase My Mortgage Pre
Make sure that the prospective lender has accurate information, particularly on income and liabilities that you may have. You can ask to see the credit report that the lender used, and if you believe that it contains errors, you can contact the relevant credit bureau. Youll also need to contact the company that provided the information. You can also try other lenders, which might have different criteria. Remember, however, that multiple credit checks in a short time period can hurt your credit score.
How To Get Approved For Your First Mortgage
Modified date: May. 31, 2021
As the U.S. economy continues to rebuild from the recession that was almost nine years ago, lots of people are looking to buy homes after years of renting or staying put in a previous house. As a result, the real estate market is competitive in many parts of the country, requiring buyers to put in aggressive offers and, in some places, compete with deep-pocketed investors paying cash.
What this means is thatnow more than everyou need to be qualified for a mortgage before you shop for real estate.
If youre looking for a mortgage lender, is free, online, and convenient.
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Save Two Or More Months Of Cash Reserves
Reserves are funds available to pay your mortgage if you experience an interruption in income. Reserves are measured in months. So if your prospective mortgage payment is $1,000, and after closing, youll have $3,000 in savings, you have three months of reserves.
When it comes to reserves, more is better. Lenders usually want to see at least two months of reserves for wageearners and six for selfemployed or commissioned employees.
You have a strong case if you have between two and 12 months of cash reserves after paying the downpayment and closing costs.
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Show A High Fico Score
Governmentbacked mortgage guidelines consider a FICO score of 680 or higher a compensating factor. This score indicates that the applicant has demonstrated debt management skills.
The average credit score was 685 in April for completed FHA loans, according to loan origination software company Ellie Mae. This could be one of the easiest compensating factors to provide to a lender.
What Is Mortgage Pre
Its always a good idea to obtain a mortgage pre-approval before you begin house shopping. A mortgage pre-approval means that a lender has qualified you for a specific mortgage amount based on your credit history, and your income. Youll also need to demonstrate the ability to come up with the necessary down payment prior to final approval.
The mortgage pre-approval serves a few purposes. Most importantly, it gives you, the borrower, the confidence to shop for a home within a specific price point. It provides your Realtor® with peace of mind, knowing that their client has already been vetted by the lender, and it gives the lender a head start on your mortgage application, which will in turn speed up the process once youre ready to make an offer on a property.
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Income Can You Pay For The Loan
Your income determines your debt service ratio. That is, how much of your income goes into servicing all your debt payments. The government has set maximum allowable debt servicing ratios, so ultimately you wont be able to get a mortgage that you wont be able to pay for.
Income requirements are very strict, and normally only very specific documents are allowed in calculating your total income towards your application. Lenders are very specific as to what they will consider usable income versus unusable income. For example, lenders will not consider income from cash jobs, nor will they consider income from contract only positions. Also, if you just got your job you may have to wait for your probationary period to finish prior to being approved for a mortgage.
How To Up Your Chances Of Mortgage Approval
If your debts are too high or your credit score too low, maybe buying a home is not the best move right now. But it could be in a year. Or even six months. You need to start practicing for homeownership now, and this will put you in a better position to buy.
Using our Home Affordability Calculator, determine how much house you want to buy and what payment youll have to make each month.
- Subtract the difference between that new payment and what you currently pay for housing now
- Take that difference, use it to pay your debts down to a manageable amount
- Once your debt is under control, put that amount into your savings to boost your down payment
This accomplishes several things. It teaches you what youll have to live on once you buy your house, so your spending stays under control. It helps increase your credit score. And it makes you less likely to fall into that dreaded Low Credit Profile category the one lenders shy away from.
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Test Drive Your Mortgage Chances
Once you’ve done all the steps above, your finances should be in great shape. To test this, a mortgage agreement in principle , offered by many lenders, is the acid test.
It’s a conditional offer saying you may be accepted, based on a quick check of your income and, probably, your credit file. However, it offers no guarantees and it’s not compulsory. But for first-time buyers especially, it boosts estate agents’ or sellers’ confidence that you’ll be able to complete the sale, so may up your chances of having an offer accepted. Some worried sellers might only accept viewings where you’ve had a mortgage AIP.
It’s worth benchmarking a top deal with our Mortgage Best Buys tool, and asking the lender to see if you pass the checks for their AIP. Don’t worry just as it doesn’t tie them in to lending to you, it doesn’t mean you have to borrow from that lender if you spot a better deal further down the line.
Beware too many of these checks in a short space of time could harm your credit rating if the lender does a credit check and marks it on your file. This could damage your mortgage application later on.
Some lenders offer a ‘soft’ search option, which won’t be visible to other lenders . Find out from the lender which it is before agreeing to one.
Determine Your Down Payment
It helps to know how much you can provide as down payment before you start looking for a home. The size of your down payment may have an impact on the amount you get pre-approved for. Plus, down payments of less than 20% of the purchase price of a home require mortgage default insurance, whereas down payments that are 20% or above may not.
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What Changes Your Credit Score
These 5 factors provide a glimpse into your financial habits and history, and help lenders assess your financial health. Home buyers with lower credit scores are typically assigned a higher interest rate.