Getting to “Yes,” What Lenders Look For
If you’re about to embark on your first home purchase one of the very first things that comes to mind is how much your monthly payment will be. You also want to know how much of a down payment you’ll need and how much you need to have for closing costs as well. There’s a lot to a mortgage loan application and your lender will know quite a bit about you once your file is completely documented. But what the lender really does is make sure the information you provide fits the selected lending program. The lender really isn’t interested in your personal life but will get to you know both financially and from a credit perspective. But while looking from the outside getting a home loan approved looks a bit mysterious, it really isn’t. Here is what lenders look for when approving a home loan application.
First, the lender wants to see at least a two year employment history. This is verified by providing the lender with your W2 forms from the previous two years. If you’ve just graduated however from school however, lenders can reduce this two year requirement but in general you can expect to provide a two year work history. For those that are self-employed, lenders ask for two years of federal income tax returns, both personal and business, showing consistent, year-over-year earnings. Lenders also make a determination that any income received is expected to continue for at least three years. With a history, the lender assumes you’ll continue to be employed.
Your gross monthly income will be compared with your new mortgage payment including a monthly amount for property taxes, insurance and mortgage insurance if required. This is referred to as your housing or “front” ratio and expressed as a percentage. Your gross monthly income is validated by reviewing your most recent pay stubs covering 30 days. If your gross monthly income is $6,000 and your total house payment is $2,000, then your debt ratio is 30 (percent). Lenders then consider all other monthly credit obligations such as a car payment or student loans. Using this same example, if there is a $500 car payment and a minimum monthly credit card payment of $50, total debt including the housing payment is then $2,550. The total debt, or “back” ratio is then 42. Lenders like to see these two ratios be somewhere around 33 and 41. In this example, these ratios would qualify.
As it relates to a down payment and closing costs, lenders need to make sure you have sufficient funds to close as well as have a little left over after the closing has taken place. This is verified by providing bank statements showing you have enough funds to close and those funds belong to you.
Lenders are also tasked with making sure you have demonstrated responsible credit usage by reviewing a credit report and pulling credit scores. Different loan programs have different score requirements and lenders can always make exceptions but in general minimum credit scores hover around 600.
Finally, the lender also approves the property once you make an offer on a home and it’s accepted. The lender will make sure there are no permanent liens or claims filed against the property by ordering a title report. The lender also orders a property appraisal to determine the value of the home being purchased.
There are other items that are evaluated but in general these are the most important. Just work with your loan officer and please ask any questions you have along the way. The mortgage approval process is much easier than you think when you know what lenders are looking for.