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What lenders focus on when approving mortgage applications

Find out what lenders look for when reviewing and approving mortgage applications.

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Buyers already know about boosting credit scores, polishing credit history, paying a down payment, and maintaining a steady income to obtain a mortgage. To increase the odds of securing a mortgage, however, buyers must understand the process through the lenders’ perspective. Banks and lending institutions emphasize these qualifications.

Proof of income

Lenders prefer evidence of available income. To obtain this, companies require bank statements listing the current balance. Bank statements from investments, savings, retirement, and bonuses may be necessary too. Lenders will ask for income tax forms for the past two years or check stubs as proof of employment. They tabulate the information to determine financial stability and gross income. 

Stable employment

A good job doesn’t impress lenders. What impresses lenders is stable employment. To them, stable employment equals two years or more as an employee of a company. This gives lenders serenity that income is available and confidence that employment will remain stable for the loan’s duration. Furthermore, lenders will call the place of employment to verify employment status and financial information. 

A person without stable employment isn’t out of the running. Certain professions cannot guarantee steady employment, so lenders will concentrate on monthly gross income through tax returns. Actors, below-the-line workers, travel nurses, temp services, and self-employed are examples. 

Debt-to-income ratio

Contrary to popular belief, lenders don’t require buyers to be debt-free or incur a zero balance to qualify. Lenders view debt as equal to income, and the best candidates have low debt and high income. The debt-to-income ratio is a comparison between debt accumulated and income earned. This assures lenders that mortgage payments won’t be a financial burden. The accepted percentage varies by the lending company. 

Two routes to calculate debt-to-income ratio are the front end and the back end. Financial expert Greg Mahnken explains the two. The front-end debt-to-income ratio is your housing expenses divided by your monthly income. The formula is this: (housing expenses / gross monthly income) x 100. Mahnken continues by saying the back-end debt-to-income ratio is monthly debt expenses divided by gross monthly income. The formula is this: (sum of all monthly debt expenses / gross monthly income) x 100.

Lenders will always look at stable employment, meaning that you’ve been an employee at a company for over two years. (Source)

Credit report imperfections

The first blemish not to have on credit reports are red flags on the credit report. Those are bankruptcy, short sales/home auction, foreclosure, collection accounts, delinquency, and recent credit applications. The second blemish is rollover outstanding balances. Payment history tells lenders how the person approaches timely payments, and outstanding balances carried over to the next payment period dampen chances of mortgage approval. The third blemish is credit history length. Short credit histories don’t paint a clear picture of a person’s financial history, so long credit histories are favorable. The last blemish is recent purchases. Major purchases occurring during the home buying process will lose points with lenders.

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Credit utilization

Greg Mahnken simplifies credit utilization’s meaning, defining it as the percentage of credit a person uses. In fact, he says credit utilization makes up 30% of a FICO score, so it’s very important. 

Lenders want to know a person’s reliance on credit cards. It begins by learning the credit card limit, which is between $500 and $10,000. A low level improves credit score. Mahnken agrees that low credit utilization improves credit scores. However, he encourages people to reach and maintain a 20% utilization. Therefore, if a credit card limit is $5,000, the 20% utilization is $1000. 

Lenders want to know a person’s reliance on credit cards. It’s important to know your credit card limit, which can found on credit card statements or by calling your card issuer. The amount you’ve spent on the card when your monthly statement is created is divided by your credit limit to calculate your credit utilization.  For example, if a credit card limit is $5,000, the 20% utilization is $1000.  Mahnken agrees that low credit utilization improves credit scores. The lower the better, with a 1% utilization rate being ideal for your credit scores. You should keep in mind that you should still pay the bill in full each month to avoid paying interest and fees.

Lenders want to know a person’s reliance on credit cards. It’s important to know your credit card limit, which can found on credit card statements or by calling your card issuer. The amount you’ve spent on the card when your monthly statement is created is divided by your credit limit to calculate your credit utilization.  For example, if a credit card limit is $5,000, the 20% utilization is $1000.  Mahnken agrees that low credit utilization improves credit scores. The lower the better, with a 1% utilization rate being ideal for your credit scores. You should keep in mind that you should still pay the bill in full each month to avoid paying interest and fees.

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Bad credit utilization is a maxed-out credit card. Using too much credit lowers credit score, informing lenders the person will have difficulty paying bills on time. Mahnken comments on the disadvantages of available credit, saying too much credit informs lenders the person will end up in debt. He stresses not to open new credit card accounts just to lower credit utilization (because it’s counterproductive).

This is a general list of indicators lenders rely on to select the right candidates. Banks and lending institutions offer additional requirements not listed here, so please ask the lending company about it. View the mortgage process from the reverse side of the coin to gain a better understanding of the selection process.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Tonya Jones Reynolds is a freelance writer specializing in real estate, marketing, and money articles for Born2Invest. Some past and present companies she writes for include Blogmutt, YouQueen, Blasting News, Reflect & Refresh, Inman News, Goals.com, and Textbroker. With 7+ years of experience as a freelance writer, she joined Born2Invest as a contributor to help readers make good decisions about their financial and professional lives.

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