To some potential buyers, particularly first-time buyers, the prospect of meeting a mortgage lender may seem a little scary. Lenders ask a lot of questions because they want to help you get a mortgage. If you work with a lender before you decide on a home, you will know whether you’ll qualify for a mortgage large enough to finance the home you want.
It may seem that your lender needs to know everything about you for the application, but actually all the lender needs to know about is employment, finances and information about the home you’re buying (but you can be pre-approved before you choose a home). You will, however, need to provide quite a few details about these topics. The goal is to arrive at a monthly payment you can afford without creating financial hardships. Here's an idea of what lenders consider when they are qualifying you for a loan:
Lenders look at your income in ways other than the total amount; how you earn it is also important. For example, income from bonuses, commissions and overtime can vary from year to year. If these sources make up a large percentage of your income, your lender will want to know how reliable they are.
Your lender will also consider the relationship between your income and expenses. Generally, your fixed housing expenses (mortgage payment, insurance and property taxes, but not repairs or maintenance) should not be more than 28 percent of your gross monthly income, although this is not an absolute rule. Your lender will also consider other long-term debts, such as car loans or college loans. It is a good idea to bring the following when you meet with your lender:
- Employment, salary and bonuses, and any other source of income for the past two years (bring your most recent pay stub, previous year’s W-2 forms and tax returns if possible)
- The most recent account statement showing the amount of any dividend and interest income you received during the past two years
- Official documentation to support the amount of any other regular income you may receive (alimony, child support, etc.)
Job stability is a factor that a mortgage lender will look for, and two years at your current job helps, but this also is not an absolute requirement. If you change jobs but stay in the same line of work, you should not have a problem — especially if the job change is an advancement or increase in income.
Your credit score also helps to predict how likely you are to repay the mortgage debt.
- Current balances and recent statements for any bank accounts, including checking and savings
- Most recent account statement showing current market value of any investments you may have, such as stocks, bonds or certificates of deposit
- Documentation showing interest in retirement funds
- Face amount and cash value of life insurance policies
- Value of significant pieces of personal property, including automobiles
- Debt Information
- The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you may have
The lender does the best possible job of ensuring that a borrower qualifies for a loan. The final decision, however, rests with the lender's underwriter, who measures the total risk that the specific investor, who backs up the loan, is taking. Each investor (or investment company) has its own underwriting guidelines (often using statistical models), so while the underwriters evaluate many of the same factors as the lenders, they may look more closely at some areas than others, depending on the guidelines. For example, while the lender may have pre-approved you before you chose a home, by the time you get to underwriting, you will have chosen the property you want to buy, and the underwriter will review the property details closely.
However, most of the information used is the same as that used by the lender, but it may be evaluated differently. The underwriter will evaluate the borrower's ability to pay (income), willingness to pay (credit history), and the collateral (property). As underwriters analyze each of these risks (although this is not a complete list), here are some possible guidelines they may use:
- Is the income sufficient to repay the loan? Ratio guidelines of 28 percent payment-to-income and 36 percent total debt-to-income are standard, but some programs allow for higher ratios.
- Is the income stable from month to month and year to year?
- Has the borrower been on his/her current job and in the same industry for a sufficient amount of time? A minimum of two years is the standard guideline, but exceptions can be made.
- Can the income be verified?
- Does the borrower have a good credit score (typically, 680 or higher is considered good)?
- Does the borrower have late payments, collections, or a bankruptcy? If so, is there an explanation that can be provided for the late payments/collections/bankruptcy?
- Does the borrower have excessive monthly debts to repay?
- Is the borrower maxed out on credit cards?
Is the property worth what the borrower is paying for it? If not, the lender will not loan an amount in excess of the value. If the appraisal comes back less than the offer on the house, sometimes you can renegotiate the terms of the purchase contract with the seller and his/her real estate agent.
Some borrowers agree to purchase the home at the price they originally offer and pay the difference between the loan and the sales price. You need to have disposable cash to do this, and you should assess whether the property is likely to hold its value. You also need to consider the type of loan for which you have qualified. If you need to move suddenly and have a large loan relative to the original value, and the property has not held its value, you could face a difficult cash shortfall when you go to pay off your loan.
Is the property an acceptable type of property, and does it meet coding requirements and zoning restrictions? Is the property comparable to other properties in the area? Surveys are common and are used to get an accurate measurement of the land that goes with the property you are purchasing. The person who prepares the survey should be a licensed land surveyor. The survey shows the location of the land, dimensions of the land and any improvements.
Encroachments are improvements to property that illegally violate another's property or their right to use the property, such as building a fence that is actually on your neighbor's property instead of yours, or constructing a building that crosses from your property to another’s property without their permission. Evidence of encroachments can slow the final approval process.
A downpayment is a percentage of your home's value. The type of mortgage you choose determines the downpayment you will need. It can range from zero to 20 percent, or more if you wish.
A number of loans are available that do not require high downpayments, particularly for first-time home buyers. FHA loans, for example, may require less than 5 percent down, and veterans or those on active duty in the military can obtain loans with no downpayment at all. In addition to downpayment assistance, these programs may have less strict guidelines for loan approval, such as allowing a higher ratio of payment to income or debt to income. They also may accept alternative forms of credit history if you have not established credit through traditional means — credit cards and car loans. For example, a lender could look at the history of utility payments and rent payments to determine credit worthiness.
Several state and federal programs provide downpayment assistance but may have income and other guidelines. See Special Programs.
For more information on qualifying for a loan, see How Do You Buy a Home? Step 5: Submit the Application.