What Factors do Mortgage Lenders Use During the Loan Process?
The purchase of a home is one of the biggest purchases you’ll ever make. As such, securing adequate financing through mortgage lenders to make the purchase is essential for most homeowners. Some consumers are concerned about whether they will be eligible for a mortgage loan.
If you’re not sure whether you’ll be approved, you need to do your research. The more you know about possibilities and resources, the easier it will be to buy a home. You need to understand what a mortgage loan is and how it works. One of the most important things to know is what factors mortgage lenders are looking at.
Getting ready to buy a home is exciting. It can also feel overwhelming as well. There is a lot of information to process. Your primary concern should be finding mortgage lenders who will approve you. Acquiring financing is generally the biggest obstacle to overcome. However, you should be able to find a mortgage loan appropriate for your needs and budget with persistence.
What is Important About Your Finance Status to the Mortgage Lenders
All this information is no doubt helpful. However, what you’re probably most interested in is whether you qualify for a mortgage loan. To determine whether you’ll qualify, you need to know what lenders look at. All mortgage lenders look at certain factors when deciding on a loan application.
Knowing what factors lenders look at helps you to know what to expect. You want to be prepared when you apply. You also don’t want to apply if there is very little chance you’ll be approved. Therefore, you should know that the following six factors help determine your mortgage loan worthiness.
Your income is an important factor. The lender wants to see that you’re earning enough to keep up with mortgage payments. You’ll need to provide details on how much you make per year. You’ll also need to provide information on how long you’ve been at the same job.
The lender doesn’t just want to know you’re making money. The lender also wants to know that your income is reliable and will continue throughout the life of your mortgage. If you’ve been at the same job for several years, mortgage lenders consider your income reliable. If you’ve just started your first job, it may be more difficult to be approved.
Mortgage lenders will probably want to know what’s in your savings accounts. Having extensive savings shows that you are financially stable. Not having a lot of money saved up doesn’t necessarily mean you won’t qualify. However, large savings accounts certainly give the lender greater peace of mind. Anyone who is interested in purchasing a home in the near future should start growing their savings.
Your Credit History
Your credit history is one of the number one considerations to consider. Obviously, lenders will not want to lend to you if you’ve defaulted in the recent past. Also, lenders will be less inclined to approve you if you have a history of missing payments.
Lenders want to know that you’re reliable as a borrower. You need to show that through your performance with your credit accounts. You need to start and nurture a strong credit history. If you have never had a credit card or loan before, you have no credit history. Lenders might be less inclined to lend to someone with no credit history than someone with a lower credit score. Having no credit history means mortgage lenders can’t really know what kind of borrower you will be.
Your Down Payment
The larger your down payment, the better it looks to lenders. When you make a large down payment, you’ve got some skin in the game regarding your home purchase. Lenders know that keeping up with payments will be all the more important for you when you’ve already made a significant investment in the property.
Making a larger down payment doesn’t just make you more attractive to lenders. It also minimizes your interest costs. You don’t have to pay interest on your down payment. The more your down payment is, the less of your home purchase price you have to pay interest on.
Your Current Debt Load
Mortgage lenders will want to look into how much you already owe. If you’re currently dealing with a heavy debt load, lenders will consider that taking on more debt is not a good idea. Every debt you have means an additional expense each month.
Lenders don’t just look at the total amount you owe. They also look at how much you owe in relation to how much available credit you have. If all your credit cards are maxed out, then you’re already using most of your available credit. If your debt load is heavy, you might want to take time to pay it down before buying a home.
The Home You’re Buying
Lenders don’t want to lend money for a home purchase that is overpriced. They also don’t want to provide a loan for the purchase of a run-down house. The house you purchase is basically collateral on your loan. The lender will repossess the home if you fail to make payments. However, the lender won’t be able to recuperate the loan money if they can’t sell the property to cover the outstanding loan balance.
Mortgage lenders often want to inspect the home that the borrower is purchasing. They want to make sure that the property is a good investment. Therefore, the home you want to buy could influence the decision lenders to make on offering you a mortgage loan.
A mortgage loan is much like any other type of loan. It is an agreement where a lender agrees to loan you the money you’ll use to buy a property. You’ll gradually pay the lender back the loan money. As you pay your mortgage loan, you build up equity in your home. Once you finish paying your mortgage, you own your home outright. However, the lender can repossess your property if you fall behind on payments.
You have to pay interest on your mortgage loan. That’s how mortgage lenders make money. The lower the interest rate on the loan, the less expensive it is. You need to understand all your home buying options before taking out a mortgage.
Choosing to take out a mortgage is a big decision. You don’t want to take out a mortgage that is going to be hard on your budget. Your credit will be severely damaged if you default on your mortgage loan. Make sure you plan your budget carefully. While owning a home may be your goal, you still need to protect yourself financially. Be careful you’re not getting in over your head with an excessively large monthly mortgage payment.
Going to a Banker or a Broker?
Both mortgage bankers and brokers offer mortgage loans. If you’re buying a home, you can choose between working with a banker or broker. There are advantages to each method of acquiring a mortgage loan.
Working with a mortgage banker means you go directly to a bank or credit union. Then, you inquire about their available mortgage loan products. You’re only going to be considering mortgages available through that particular financial institution.
When you borrow through a mortgage broker, your broker can analyze your unique situation. Your broker has more resources at his or her disposal than a banker might. The broker can compare mortgage loans from a variety of different financial institutions. This means greater customization of services.
A broker may be able to pinpoint the perfect mortgage for you. However, you’ll have to pay a broker fee if you work with a broker. Borrowing directly from a bank also tends to be a little more reliable and predictable. Mortgage brokers are independent professionals while bankers are working for large and established financial institutions.
Types of Mortgages to Consider
You need to consider mortgage type in addition to considering whether to work with a banker or a broker. Those who buy a home for the first time are often surprised by the variety of mortgages. There are quite a few different types to consider.
Here are some of the basic mortgage types to look into.
A fixed-rate mortgage is among the most basic mortgage types. With a fixed-rate mortgage, the interest rate doesn’t change throughout the life of the loan. Also, the amount that’s paid on the loan each month doesn’t change. There are options for different term lengths with a fixed-rate mortgage. You can pay off the mortgage in only 10 years. You could also opt for a longer loan term of 30 or 40 years.
Fixed-rate mortgages are especially advantageous if interest rates are low when you purchase your home. This way, you know your interest rate won’t go up with fluctuations in the market.
Adjustable-rate mortgages are another common type of mortgage loan. Unlike fixed-rate mortgages, adjustable-rate mortgages experience changes in the interest rate depending on the economy.
There are numerous possible arrangements for an adjustable-rate mortgage. One common option is a 5/1 adjustable-rate mortgage. With this setup, the interest rate will not change until five years have gone by. Afterward, the interest rate can fluctuate with the market.
You need to be careful with adjustable-rate mortgages. If your monthly payment and interest rate gets too high, you could struggle to keep up with payments.
When you take out an interest-only mortgage, you focus on paying the interest off right away. You pay the interest on the mortgage off during the first few years. This can help minimize interest costs. Once all the interest is paid, you pay the remaining balance off. This balance is then paid off much like a fixed-rate mortgage would be.
FHA loans are government-subsidized loans. The Federal Housing Administration guarantees these loans. This makes FHA loans a little easier to qualify for. If you have a low credit score, you might want to look into FHA loans. FHA loans aren’t just more flexible when it comes to credit score. They’re also more flexible regarding income. You might not make enough money to qualify for a traditional loan. However, you might find that you can be approved for an FHA loan thanks to more lax underwriting.
If you are a veteran, you may be able to take advantage of a VA loan. These loans are made available to those who have served in the armed forces. One big advantage of VA loans is that you don’t have to put a down payment on the home. VA loans also generally offer great terms and flexible options.
A balloon mortgage arrangement requires you to pay off the interest first. Once the interest is paid, you’ll be expected to pay off the entire principal of the loan.
Subprime Mortgage Loan
If you don’t have the best credit, you’ll be shopping for the subprime mortgage loan market. Mortgage lenders are often willing to lend to those with poor credit. However, they will charge higher interest rates on subprime loans.
Dealing with subprime mortgage loans can be tough. You need to be reasonable and avoid excessive mortgage costs. If you’re looking at subprime offers that are expensive, you might want to wait and improve your credit before buying.
How the Process Works
The process of applying for a mortgage loan is similar to the process of applying for any loan type. The lender will ask you to fill out an application. You’ll provide information about your identity. You’ll also provide information about your employment situation. The lender will want to know how much money you’re making. The lender will ask you for your social security number and run a credit check.
Every lender is a little different. The way mortgage lenders process and evaluate applications varies. Generally, you should know quickly whether you’re approved.
Research and Getting Quotes
You shouldn’t just jump into applying for a mortgage loan right away. There is some important research to do first. This research involves first looking into your options. Evaluate your credit and income situation. Find mortgage lenders who are likely to be willing to work with you.
Some lenders might offer a loan estimate when you’re shopping for a mortgage. This allows you to see how much you can qualify for without actually applying. Once you’ve found some lenders who you think may approve you, it’s time to apply.
Filling out mortgage loan applications is generally fairly simple. Most of the information you’re asked on the application will be things you know off the top of your head. Some mortgage lenders allow prospective borrowers to apply online for pre-approval. Others might require a paper application.
When it comes to applying, you’ll generally be looking for pre-approval. Usually, with home shopping, you don’t officially apply until you’ve found a home that you’re interested in buying. You’ll, therefore, seek out pre-approval as an important step in the mortgage loan process.
Closing the Sale
Once you’re pre-approved for a mortgage, you can start home shopping in earnest. Then, you can make an offer on the right home. If your offer is accepted, you’ll take the next steps with your mortgage loan. Your mortgage lender might want to do some research on the property you’re buying.
When you and the seller are ready to close, the mortgage loan funds will go right to the seller. You will probably have to pay closing fees, mortgage insurance premiums, and a commission for the real estate agent in addition to paying for the sale value of your new home.
Now that you’ve done some research on mortgage loan shopping, it’s time to get started. You should start improving your qualifications for a mortgage loan right away. Focus on the factors mortgage lenders looks at mentioned above. You want to make yourself more attractive as a borrower.
Analyze your financial situation and determine what you need to work on. If you’re carrying a heavy debt load, pay down your debt. If you have missed payments, focus on making all your payment due dates from here on out. Don’t feel discouraged. Your credit score changes over time. In fact, you can bring your credit score up quickly with effort. Patience and persistence pay off. Make sure you choose a mortgage loan offering reasonable terms. Your mortgage loan will affect your finances for years to come. This means you need to stay away from mortgage loans with excessively high-interest rates.
Katherine Davis is a freelance writer specializing in the subjects of finance, banking, and investment. Based in New York City, Katherine’s experiences combating the Big Apple’s outrageous real estate costs and living expenses have provided her with some great budgeting insights on stretching a dollar. A graduate of Penn State University, Katherine advises millennials to be disciplined when it comes to their finances and to start investing as soon as possible.