A mortgage loan helps you finance the purchase of a home. When you apply for a mortgage, the lender will consider various factors to determine if you qualify for the loan and, if so, how much they are willing to lend you.
Some of these factors are within your control, while others are not. In this blog post, we’ll go over some things that can affect your mortgage application so that you can be prepared when applying for a loan.
One of the most important factors lenders consider when evaluating a mortgage application is the applicant’s income. Lenders want to be sure that you have a steady income sufficient to make your monthly mortgage payments. They may look at your employment history, tax returns, and other financial documents to understand your income and ability to repay the loan.
Lenders will want to see that your income is high before approving you for a mortgage, and stability indicates that you can keep up with payments long-term. This decreases the risk they would be taking on by lending to you. Most lenders prefer that borrowers have a debt-to-income ratio (DTI) of no more than 45%. In special cases, they may allow 50% if the borrower has great credit and extra money saved up.
Your credit score is another important factor that lenders will consider when reviewing your mortgage application. The higher your credit score, the more favorably lenders will view your application. So, if you’re planning on applying for a mortgage shortly, it’s a good idea to check your credit score and take steps to improve it (if necessary).
Most loans require a credit score of at least 620 to buy a house. However, having a higher score will greatly improve your chances of getting approved for the loan. Borrowers with scores lower than 650 usually make up just a small part of closed purchase loans. Applicants with scores ranging from 740-800 generally get the lowest interest rates.
Fixing Your Credit Score
If you have a low credit score, there are some things you can do to improve it. One thing you can do is make sure you’re paying all of your bills on time. This includes major bills (like your mortgage or car payment) and smaller ones (like credit card bills, utility bills, etc.)
Another thing you can do is keep your credit card balances low. Lenders like to see that you’re using a smaller portion of your credit limit, showing that you’re not maxing out your cards and struggling to make payments.
Asking a financial advisor on how can you fix your credit score is a great way to understand what factors are looked at when approving someone for a mortgage. They can advise on diversifying your credit mix. This means having different types of debt, such as a mix of installment debt (like a mortgage or car loan) and revolving debt (like a credit card). They can also help you create a budget and payment plan to pay off your debts. This will show lenders that you’re serious about fixing your credit and making timely payments.
Assets and Liabilities
Lenders will also look at an applicant’s assets and liabilities when evaluating a mortgage application. Your assets are things like savings accounts, stocks, and bonds; anything that can be used to pay off debts or cover expenses. Lenders use your net worth to determine whether you will make your mortgage, down payment, and closing costs on time. They’ll also consider what assets you have to see if you can keep making timely payments even if you lose your job.
Liabilities are debts you have to pay off. Your liabilities are debts like credit card balances and student loans. Lenders want to see evidence of your liabilities because it helps them assess how much debt you’re currently carrying and whether you can handle additional debt obligations.
Is Mortgage a Liability?
A home loan is a responsibility that a borrower agrees to when they take out a loan from the bank to purchase a house. This debt must be repaid by the terms set in the signed agreement.
Home loans are an asset for the lender because they’re a form of accounts receivable. The payments you make on your home loan are money the lender expects to receive. Your property secures these receivables, and the lender has a lien on your property until you repay the loan. They extend a principal amount to you but charge interest for doing so. Lenders can earn revenue by selling entire loans to other businesses or organizations.
These are just a few factors that can affect your mortgage application. When you’re ready to apply for a loan, have your financial documents in order and take steps to improve your credit score if necessary. If you do all of this ahead of time, you’ll be in good shape when it comes time to fill out your application.