What Do Local Mortgage Lenders Look For?

Thinking of buying a house? Unless you’ve saved up a big enough chunk of change to pay for the house in full, you’ll likely need financing from a mortgage lender to purchase your real estate.

Lenders won’t give money to just anyone. When it comes to borrowing money, your credit score, income, and debt load will affect how much you can borrow, what interest rate you pay, and whether or not you even get the loan in the first place.

We’ve compiled this quick guide, so you know exactly what a mortgage lender is going to be looking at when you ask to be approved for a mortgage.

5 Things That Home Mortgage Lenders Look For

These are the five key points that lenders will focus on when you apply for a mortgage.

1. Credit History and Credit Score

One of the first things that a lender will look at is your credit score. Your credit score paints an overall picture of your creditworthiness to lenders. This number is crucial, taking many factors into account. The three major credit bureaus— Equifax, TransUnion, and Experian— calculate the three-digit number using your:

• Payment history
• Length of credit history
• Number of credit accounts
• Credit usage
• Types of accounts
• Recent activity

The exact scoring model and calculation formula differ across the different credit bureaus, but these six factors will all count.

One in five people have an error on their credit report.”

It’s a good idea to check your credit report to correct any errors—some of the information reported may not be correct. A study from the Federal Trade Commission found that one in five people have an error on their credit report!

Let’s say your credit score is less than ideal. What then?

The higher your score, the lower the interest rate on your loan. If your FICO score is below 620, you will be considered a higher-risk loan candidate. You should expect to pay at least two percent more in interest on a loan than a “prime” borrower taking out the same loan.

But if you have had credit problems in the past, don’t count yourself out yet! There are ways that you can raise your credit score. You can also talk to your lender, explaining and verifying your situation. If there are extraordinary circumstances, your lender may be able to make an exception.

2. Income Stability

If you have a steady and predictable stream of income every month, you are perceived as a more trustworthy borrower. Banks will want to see some sort of verification of income when you apply for a mortgage.

This can be more than your salary. If you have other verifiable income and financial assets with at least a two-year history, these will work to your advantage. Examples include investment income, freelance income, social security, disability, commissions, royalties, and alimony payments.

Knowing your income is also important for the next factor that lenders look at: your debt-to-income ratio.

3. Debt-to-Income Ratio

Lenders want to ensure that you have the capacity to take on a large loan. They do this by calculating your debt-to-income ratio. This number divides the total amount of your monthly debt payments by your gross monthly income. Lenders traditionally prefer that your combined debt not exceed 36% of your monthly pre-tax income.

Generally, that breaks down as 28% for housing expenses and 8% for other debts. Housing expenses include principal, interest, taxes, and insurance, but can also include condominium maintenance fees and homeowners’ association fees. Items considered in your debt calculation include credit card balances, installment loans (such as auto loans), and student loans.

Because of this, it’s a good idea to reduce your debt as much as possible before applying for a mortgage. If you pay down your debt (provided your income doesn’t also drop), your debt-to-income ratio will shrink, making you a more attractive borrower.

4. Major Derogatory Marks

In addition to your credit score, lenders will be looking at your credit history. Your credit history is found in a detailed report of information provided by lenders who have already extended credit like student loans, auto loans, credit cards, and more.

They’re looking for one thing in particular: major derogatory marks.

Generally speaking, major derogatory credit entries are any credit accounts that are 60-90+ days past due. At that point, you’ve gone from having a late payment to defaulting on your financial obligation.

These bad marks on your credit report can include:

• Bills that have gone to collections
• Charge-offs
• Repossessions
• Foreclosures
• Bankruptcies

These all negatively affect your credit and hurt your ability to get a loan.

5. Loan-to-Value Ratio

A loan-to-value (LTV) ratio is the amount of your loan proportional to the value of your property. A lender’s ideal LTV is 80%, which means you’re putting 20% down and borrowing 80% of the property’s value.

Here’s an example. Say you want to buy a house whose value is $100,000. The bank will be hesitant to lend anything over $80,000, which is 80% of the property’s value. This means that you will have to come up with at least $20,000 for the down payment.

Smaller down payments usually trigger specific requirements, like property mortgage insurance (PMI). The lender may also take, hold, and pay your annual insurance and taxes, rather than allowing you to manage those funds.

Every mortgage is different, and putting 20% down is not everyone’s reality. If you can put a larger down payment over 20%, you won’t be required to carry PMI, and you might get a lower interest rate on your mortgage, too.

If coming up with a down payment is a challenge, there are loan programs designed to help you buy a home without a lot of cash. You might also consider using gifted or borrowed funds if those are available to you.

Have Your Documents Ready When You Apply for a Mortgage

Though it would certainly make it easy for borrowers, lenders aren’t going to take your word for it when it comes to proving any of the above factors. Lenders will look at credit reports, salary history, and two or more years of tax returns. If you have credit issues, be ready to explain them.

Remember: lenders make money when they lend money, but they are also required to prove that they are making prudent lending decisions! It’s better for everyone if you come fully prepared to be an excellent borrower.

Here at Amplify, we want to help all of our members make savvy, responsible financial decisions. If you’re curious about what a mortgage with Amplify would look like, contact us today or learn more about our mortgage loans!

Reduce your debt as much as possible”

Because of this, it’s a good idea to reduce your debt as much as possible before applying for a mortgage. If you pay down your debt (provided your income doesn’t also drop), your debt-to-income ratio will shrink, making you a more attractive borrower.

4. Major Derogatory Marks

In addition to your credit score, lenders will be looking at your credit history. Your credit history is found in a detailed report of information provided by lenders who have already extended credit like student loans, auto loans, credit cards, and more.

They’re looking for one thing in particular: major derogatory marks.

Generally speaking, major derogatory credit entries are any credit accounts that are 60-90+ days past due. At that point, you’ve gone from having a late payment to defaulting on your financial obligation.

These bad marks on your credit report can include:

• Bills that have gone to collections
• Charge-offs
• Repossessions
• Foreclosures
• Bankruptcies

These all negatively affect your credit and hurt your ability to get a loan.

5. Loan-to-Value Ratio

A loan-to-value (LTV) ratio is the amount of your loan proportional to the value of your property. A lender’s ideal LTV is 80%, which means you’re putting 20% down and borrowing 80% of the property’s value.

Here’s an example. Say you want to buy a house whose value is $100,000. The bank will be hesitant to lend anything over $80,000, which is 80% of the property’s value. This means that you will have to come up with at least $20,000 for the down payment.

Smaller down payments usually trigger specific requirements, like property mortgage insurance (PMI). The lender may also take, hold, and pay your annual insurance and taxes, rather than allowing you to manage those funds.

Every mortgage is different, and putting 20% down is not everyone’s reality. If you can put a larger down payment over 20%, you won’t be required to carry PMI, and you might get a lower interest rate on your mortgage, too.

If coming up with a down payment is a challenge, there are loan programs designed to help you buy a home without a lot of cash. You might also consider using gifted or borrowed funds if those are available to you.

Have Your Documents Ready When You Apply for a Mortgage

Though it would certainly make it easy for borrowers, lenders aren’t going to take your word for it when it comes to proving any of the above factors. Lenders will look at credit reports, salary history, and two or more years of tax returns. If you have credit issues, be ready to explain them.

Remember: lenders make money when they lend money, but they are also required to prove that they are making prudent lending decisions! It’s better for everyone if you come fully prepared to be an excellent borrower.

Here at Amplify, we want to help all of our members make savvy, responsible financial decisions. If you’re curious about what a mortgage with Amplify would look like, contact us today or learn more about our mortgage loans!