Thinking about buying a home? While searching for a home can be exciting, the process should begin long before you attend any site visits.
Getting prequalified for a mortgage may give you a buying edge and serves as a good indicator to potential sellers and real estate agents that you are a serious buyer. Moreover, it may also serve as a dry run in the home financing process. While it’s nonbinding (because the information you provide has not been verified), it may give you a better idea of what you could afford and help you prepare for your official mortgage loan application.
Although determining exactly what lenders look for when reviewing your home loan application is difficult to pinpoint, ultimately, most mortgage lenders are concerned about the same basic thing – your ability to repay the home loan. What to keep in mind:
Your Credit Score (payment of loans)
Credit activity and scores have a major impact on mortgage approvals and may influence the type of home loan and the interest rate you receive. The lowest rates available are typically only obtainable by borrowers with high credit scores. Lenders use these scores to help assess the risk being taken when providing you with home financing.
In addition to your credit score, mortgage professionals will also review your payment history, which is considered to be a strong indicator of your likelihood to make timely payments in the future. The percentage of available credit you’re using, the length of your credit history and recent efforts to obtain additional credit may all affect your score.
Are you in Debt?
You don’t need a zero balance on all of your credit cards to qualify for a home loan. However, the less you owe to creditors, the better. Lenders use your debt-to-income (DTI) ratio – a personal finance measure that compares the amount you earn to the amount you owe – to help make sure you won’t be over-extended with your new mortgage payment.
Debt-to-income limits may vary based on the loan program, but in many cases are between 43%-50%. To calculate your DTI, add up all your monthly debt payments and divide them by your gross monthly income.
Also, you should avoid taking on any new debt or making major purchases until after you’ve closed on your home loan. Lenders recheck your credit before closing and any new debt could delay or even prevent your mortgage from closing.
Your Income
In order to qualify for a mortgage, lenders need proof of income. With two years of tax information, lenders can see if your income is steady, dropping or increasing.
If you’re self-employed, lenders will look at the adjusted gross income on your tax return to see if your business is making money.
Your State of Employment
Just as a lender will review your income, the same can be said for employment history for most loans. Not having steady work for the last two years could potentially impact your eligibility.
Lenders will call your current employer to ensure you are still employed and to verify your salary. If you’ve changed jobs during the last two years, lenders may contact your previous employers, too.
Your Assets
Mortgage lenders may ask for your bank and investment account statements for the past two months to ensure any money you claim to have is actually there.
They’ll want to verify it has been there for several months and to see if you have cash reserves. Lenders may question recent large deposits, as they may give the impression that the money is not yours.
Do you have a Down Payment?
Consider your down payment as an investment in your home’s equity. While there are mortgage programs that require no money down out of pocket, you may have access to more favourable financing options with a down payment.
There are a number of programs that require a lower down payment, allowing you to finance up to 97% of the purchase price. But in most cases, you’ll have to pay mortgage insurance if you put down less than 20%. This extra insurance protects the lender against losses if you default on the mortgage.
Receiving money from a friend or relative for the down payment is acceptable, but you will need a gift letter to prove that money is not a loan or from the seller. Certain loan programs may also have certain restrictions regarding gift funds. Ask your loan officer for more details.
If you don’t have money for a down payment, don’t worry. There are Mortgage lenders that offer 100% financing options and several down payment assistance programs for which you may qualify.