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Things Mortgage Lenders Look for on Your Application

You are ready to move out of your apartment, move on from a roommate situation or your parent’s place into your very first home. While it is an exciting time, you need to be ready to take the necessary steps to set up your finances and applications before you begin searching for a new home.

We know how stressful this time can be. You’ve probably compiled quite a few questions for the mortgage lender. Here are a few answers to help you get off on the right foot.

1. Credit Score

Although the most favorable credit score in the eyes of a lender is 850, it’s a difficult goal for most people to reach. According to Nerd Wallet, “A score of 690 and above generally is considered a good credit score. Above 720 is excellent.” Even so, most lenders will accept an applicant with a credit score of 650 and above, although the lower your score the higher the interest rate that you’ll have to pay.

You can improve your credit standing by correcting any incorrect statements on your credit report. You can request a free copy of your credit report once a year from each of the three major reporting agencies.

A few circumstances that can have an impact on your ability to get a mortgage is Chapter 7 or Chapter 13 bankruptcy.

Again, not so much a negative, but it is a hurdle. Make sure that you’ve followed best practices to close out that chapter of your life.

2. Debt-to-Income Ratio

If you are buying a new home alone or with your spouse, take the time to review your debt. Compare it to how much you earn (net after taxes) you don’t want more than 30% of your net income allocated toward a mortgage or 45% of your gross toward all debts. This will help you to figure out if now is the right time to purchase. There are free calculators on the internet you can use that can provide an amount of a mortgage that you can afford. Check out this Rent vs. Own Calculator to see if it pays for you to buy a house.

3. Total Balance of Your Checking/Savings Accounts

Remember to include money in your IRA, checking and savings accounts when applying for a mortgage preapproval. It can help to strengthen your application when mortgage lenders are reviewing your debt to income ratio.

If you are planning to buy a house 6-12 months into the future, we recommend that you budget an amount each month for your down payment. Depending on the type of property or lender, a down payment can be between 5-25% of the cost of the house.

4. Employment or Business History

If you have a history of changing employers frequently throughout a year, it can be a concern. It will be helpful if you have worked at your place of employment for 2+ years.

Do you run a full-time business? The bank will most likely request a letter from your CPA to confirm the annual income you receive per year.

5. Rental History

While it is not a requirement, if you have years of experience as a renter that has paid their rent on time each month, the lender will believe you can do the same with your first home.

It is not a guarantee that an excellent rental history will help you with the application, but it is better than not having experience at all.

6.  Assets

A mortgage specialist will ask if you have assets that include a car, rental property, boat, or tangible commodities to add to the application. In their minds, if you default on the mortgage, they can use these items to pay off debt.

7. Term of the Loan

Many lenders will offer a several different term loans such as 15 year, and 30 year mortgages. A 15 year term is preferable because it says you can pay the mortgage off in a shorter time frame and will pay much less in interest. The downside to this is the payment will be higher than with an extended duration so most first-time homebuyers can’t afford it.

8. Use of Property

Some people buy a house to live and do business in their home. Others prefer to buy and rent the basement or the entire house. Be prepared to be honest with this question when a lender asks you about your plans. It can impact the loan type and amount of down payment you can afford.

9. An Honest Application

The last thing you want to do is be accused of mortgage fraud for adding false information about your income or history on an application. Do the right thing and verify your data before you complete it even if you have to take the paperwork home with you.

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It can be disappointing spending your evenings and weekends searching for a new home, later to hear the news that you have one or two areas of your finances to improve before walking into your new house.

On the bright side, people from all walks of life have prepared themselves for this day. If they can do it, you can too.

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About the Author: Kym E. Booke, a CNE designated REALTOR in Las Vegas, helps individuals buy and sell homes in Summerlin, Henderson, and throughout the Las Vegas Valley.

 

 

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