(Newswire.net — March 24, 2016) — Getting approved for a home loan can seem like a major hurdle for the majority of Americans and first-time buyers. It’s a stressful process with lots of hoops to jump through, even if you’re the perfect candidate. So, what exactly are lenders looking at, and is your family a good candidate?
1. Credit Report
While every lender has their own unique process, most will start with a cursory look at your credit report. In specific, lenders will be looking at a few pieces of information.
First off, they’ll study your payment history. If you’ve missed multiple payments in a short period of time or allowed accounts to become delinquent, the lender will take this as a sign that you can’t responsibly handle larger mortgage payments each month. The second major thing a lender will look at is the age of your credit history. An extended credit history ideally shows longevity, whereas opening a line of credit just days or weeks before applying for a home loan may raise red flags.
2. Base Pay Income
Next, lenders want to know how much money you make each month. This isn’t the most important metric on the list – we’ll discuss that more in the next point – but it certainly has an impact. Your base pay income, or the monthly salary that’s guaranteed alongside your employment, holds the most weight. However, they also want to see other forms of monthly income, including commissions, bonuses, dividends, and interest.
3. Debt-to-Income Ratio
Now we come to one of the single most important metrics. While your income matters, it’s not something that’s looked at independently. Generally speaking, your income is always analyzed alongside your debt, and referred to as debt-to-income ratio.
Debt-to-income ratio simply tells lenders what percentage of your income goes to pay off debt – including car loans, credit cards, student loans, mortgages, and more. In other words, it gives them an idea of your ability to repay the mortgage, based on income and existing debt. Currently most lenders use a guideline of 43 percent, but this figure can go as low as 30 percent or as high as 45 percent in some situations.
4. Down Payment/Equity
While it’s possible to purchase a home with three or five percent down, you stand a much better chance of getting approved for a loan if you’re able to fork over 20 percent or more. This shows that you’re serious about the loan and removes some of the risk commonly associated with 95 or 97 percent loans.
There are certainly exceptions to this – including FHA loans – but you automatically increase your chances of getting a loan if you’re able to contribute 20 percent up front. Furthermore, you need to think about closing costs. These costs can vary depending on your location, but a reasonable amount is two to three percent of the loan amount.
5. Collateral
Lenders are in the business of making money from interest payments. If you suddenly stop paying your mortgage, they have to recoup their money somehow. Generally, this comes in the form of selling the property and collecting the money – but lenders hate doing this because it typically doesn’t yield much return on their part. That’s why they may look at your assets in order to understand if other collateral is in the picture.
Qualifying for a Loan
Qualifying for a loan is a big deal. As such, it takes time, effort, and a lot of meticulous research in order for a lender to approve you. Keep these five factors in mind and begin planning ahead so that you’re ready when the time comes.