10 Things Lenders Look at When Approving Home Loans
Applying for a home loan can be stressful, especially if this is your first home purchase. Knowing the criteria mortgage loan companies look for during the process can help reduce some of this stress.
Assets
It's important to list all assets on your loan application. Your assets include things like 401k accounts, bank accounts, CDs, bonds, stocks, and even the vehicles you own. Make sure you list them all. The more money you have set aside, the stronger your loan application looks.
Complete Application
Don't skip over sections of your home loan application. Make sure you read the instructions carefully and include all information required, such as copies of your income taxes, recent pay stubs, and a copy of your bank account statements. Failing to submit the required paperwork can slow the process down or lead to a loan denial.
Credit Report
Before you apply for a loan, order copies of your credit report from the three reporting agencies: Equifax, Experian, and TransUnion. Go over all entries in the report and look for errors. It takes up to 90 days for the corrections to appear on your credit report, so it's best to look over your credit reports before applying for a home loan.
Debt vs. Income
Current banking regulations suggest that there is a strong preference for a debt-to-income ratio of 43 percent or better. This means that if your monthly income is $3,000, your debt should not be more than $1,290. As a result, the house you are purchasing must be priced accordingly, so that your new mortgage payment, insurance costs, utilities, car loans, and revolving credit do not put you over the 43 percent ratio.
Down Payment
Private mortgage insurance (PMI) is charged when the amount borrowed is more than 80 percent of the home's appraised value. Rates vary, but some banks charge one percent per year or more. If the amount you borrow is $200,000, one percent PMI would come to $2,000 per year. As a result, the PMI payment is almost $170 per month. PMI goes away when you have paid enough so that you have paid enough to have built up 20 percent in equity.
Insurance
Homeowner's insurance is a must. As soon as you have chosen a house, contact your insurance agent and get quotes on how much your homeowner's insurance will cost. Your lender may also require you to purchase flood insurance if the home is in a flood zone.
Monthly Expenses
Provide a complete list of monthly expenses. The more thorough you are, the better your lender will decide if you qualify for a new home loan. List everything from credit cards to your cell phone bills.
Payment History
Your lender looks closely at your payment histories. A few late payments five years ago are not going to matter much, but payments that recent or still outstanding will affect your chances.
Price of House
Have a copy of your real estate purchase contract. The bank will require an appraisal to verify the sales price of the house is at or under the appraised value. It also shows the bank that you are purchasing a home within your financial means.
Work History
Finally, before you apply for a home loan, be prepared to show your work history. You need to be employed, and the longer you've worked for a company, the better your chances of getting approved for a loan. Mortgage lenders do not want to lend money to people who frequently bounce from job to job without good reason.
