Last Updated: February 13, 2024
Buying a home can be a dream come true for many of us. After all, you’ve worked hard and saved to be able to afford it. The majority of us cannot afford to pay for the house upfront. This is why many decide to apply for a home mortgage. But how do you make sure you get one?
What do mortgage lenders look for when deciding whether to give you a loan? Knowing this can help you get a step closer to your dream home.
What Do Mortgage Lenders Look For?
Here are a few things that lenders look at before sanctioning a mortgage. This not only affects the approval but also the interest rates and repayment terms.
- Bank statements: Bank statements are one of the top things that lenders look at. They provide a history of your loans, payments, and expenses all in one place. Lenders look at recent bank statements to make sure you have enough savings for a down payment, earn a steady income, and do not have recent debts. Many also look for any unusual or illegal activity in your bank statements.
- Credit: While credit scores play a very important part, the lender will also appreciate positive credit history with on-time payments.
- Income: A lot of people wonder why an underwriter would deny a loan without taking a look at their income. It is not necessary to have a very high monthly income to get approved, but you should have a uniform income. Income from other sources, like investments, is also taken into consideration. This is mainly done to ensure you’d be able to pay off the mortgage on time.
- Debt: Since a mortgage is a huge loan, lenders like to analyze your existing debt obligations. No one wants you to take on more debt than you can repay, especially when it comes to such a large loan as a mortgage.
- Employment: Lenders always appreciate a good employment history. Frequent changes in jobs or long gaps in between employment are seen as a red flag. But what do mortgage lenders look for in the case of self-employed people? In this case, lenders will look at your bank statements and tax invoices to make sure you’re earning a steady income.
- Down payment: Lastly, lenders like to know how much you’re willing to put as a down payment. The standard is 20% of the home value but financial institutions prefer a higher amount. It shows that you’re serious about purchasing a home.
|DID YOU KNOW: 1 in every 9 mortgage loan applications get rejected. This is because people don’t pay enough attention to mortgage pre-qualification and mortgage requirements.
Let’s begin with bank statements since they contain a lot of things that lenders will look at. It is also important to know how far back do mortgage lenders look at the bank statements. The standard time is 2 months.
- Saved up the cash: As mentioned, you should have at least 20% of your home value ready to make a down payment. The more saved up cash you have, the better your chances are. In addition to this, this money should ideally be in your account for more than 60 days.
- Cash flow: The next thing lenders look at in your bank statement is cash flow. This is to ensure that you have a steady income and will be able to pay for the mortgage. It includes income from all sources as well as your monthly expenses.
- Source of down payment: The next thing in the list of ‘what do underwriters look for in bank statements’ is the down payment. The money you pay as down payment must come from a legal source. Moreover, this money should be in your account for at least 60 days prior to making the down payment. If you’ve received the amount as a gift from someone, the lenders will cross-check with the person to ensure that it is not a loan.
- Reserves: Lenders also look at your bank reserves to get a better picture of your finances. Just like savings, reserves also reflect positively on your bank statements and can make your mortgage application more likely to be approved.
It goes without saying that bankruptcy, negative marks, and non-sufficient funds (NSFs) in your bank statements are a major red flag for lenders.
|DID YOU KNOW: Home equity loans are also a popular choice. These loans use your home’s equity as collateral.
If you’re really intent on learning how to get a mortgage, you should pay attention to your credit. And this doesn’t only include your credit score! Here are a few things to watch out for:
- FICO credit score: The FICO credit score ranges between 300 to 850. It not only helps in the mortgage approval but also plays a key role in determining the interest rates. The higher your credit score, the better your chances of getting approved as well as getting low-interest rates. The minimum requirement is usually 650 although there are many mortgage lenders for bad credit, too.
- On-time payments: On-time payments indicate that you’re financially responsible and can manage your debts. On the other hand, missed payments on your credit report will be seen as evidence that you cannot handle your financial obligations. Lenders look at your payment history to determine if you have a delinquent account. On-time payments will also improve your credit score.
- How long you’ve had lines of credit: What do underwriters look for? They will certainly look at your credit report to know how long you’ve had lines of credit. Your credit utilization ratio will also be checked.
- Any recent attempts to open new ones: Lenders will usually conduct hard inquiries on your credit report to know if you have any recent applications for a loan. The higher this number is, the more skeptical lenders get. This implies that you’ve been trying to get a loan for a long time but are not getting approved. Our advice is not to get any new loan at least 6 months prior to applying for the mortgage.
|DID YOU KNOW: Nearly 6 million homes are sold in the US on a yearly basis!
Debt & Income
The next thing to pay attention to is your debt-to-income ratio (DTI). If you’re wondering what banks look at when you’re applying for a mortgage, your DTI is probably at the top of the list. It determines how much of your monthly income goes into paying debts. The lower the score, the better your chances of approval. The average DTI that lenders look for is around 43%.
You can easily calculate your DTI by adding all your monthly payments and dividing it by your monthly gross income, that is, income before paying taxes. Your income should be a sum total of all your income, including your investments and assets. The DTI ratio helps lenders evaluate whether you’d be able to make future loan payments as a borrower.
Another important aspect is your employment history. It can say a lot about you. What do mortgage underwriters look for in your employment records? An employment history without too many job changes or gaps in between is considered good. It shows the financial institutions that you’re serious about buying a home.
Don’t worry they will not go back to your college days where you may have had several part-time jobs. They will only look at the previous 2 years. Some lenders may even ring your employer to cross-check whether you’re working there and how much you make.
|DID YOU KNOW: Nearly 65% of the homes in the US are owner-occupied.
We’ve arrived at the last thing that lenders look at and it’s the down payment. You should set aside at least 20% of your home’s value as a down payment. If not, you’d have to pay additional mortgage insurance (MI). The source of a down payment should also be legal and clear.
Potential homebuyers must be aware of the requirements for a mortgage to increase their chances of getting approved. A few things that lenders consider are detailed bank statements, credit, debts, income, and employment history. You should also have at least 20% of your home’s value as a down payment. All these things will ensure that you’re capable of taking out a mortgage and can pay it back on time.
Mortgage companies look for many things like credit, debt, income, employment history, down payment, etc., before approving the mortgage.
Lenders want to make sure you can repay the mortgage. For this purpose, they will check various things like your DTI, employment history, down payment, etc.
What do mortgage lenders look for before approving you for a mortgage? If you don’t check the requirements, your mortgage application may be declined. Ideally, you should have a good DTI, low debt, and a high credit score to get approved.