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Qualifying
a Mortgage Loan
Qualifying a Mortgage Loan -- What do lenders look for?
Underwriting Process
When you apply for a loan, lenders evaluate your application to assess
the risk involved in the loan, which is called the “underwriting”
process. In the past, underwriting was done manually by a professional
underwriter, which typically took between 30 and 60 days. However, most
lenders now use computer-based, automated underwriting systems, which
are developed to objectively and accurately evaluate the multitude of
risk factors present in most loan applications. Using automated underwriting
systems can cut loan-origination costs by slashing paperwork and speed
up the loan process. It enables lenders to offer instant decision regarding
your loan request.
Lenders make underwriting decisions based on:
- Credit report:
Your lender will order your credit report to see your credit worthiness.
Your credit report contains a factual record of your credit payment
history. It shows how you treat credit and your relationships with creditors.
- Credit Score:
Along with the credit report, lenders can also buy a credit score based
on the information in the report. Credit scoring uses statistical models
to assess an individual's credit worthiness based on their credit history
and current credit accounts. Most creditors now use credit scoring because
it allows for speedy, objective analysis of credit histories.
- Documentation you provide:
Your lender will ask you to provide documents that show your employment,
income, assets and liabilities, such as your W-2 form, tax return, mortgage
statement, bank statements, purchase contract, and etc.
What Lenders Look For
IIn attempting to approve homebuyers for the type and amount of mortgage
they want, mortgage companies look at a number of things. Though the requirements
and guidelines vary according to lenders, loan programs and even market
conditions, what lenders look for can be broken into three categories.
Note: It is important to remember
that there are no rules carved in stone. Each applicant is handled on
a case-by-case basis. So even if you come up a little short in one area,
perhaps one of your stronger points will make up for the weak one. Everyone
involved in real estate is in the business of selling homes, in one
way or another. Therefore, if the loan makes sense, mortgage companies
and insurers will do their best to see that you qualify.
1) Ability to Repay: Can you afford to pay back this loan?
Lenders don’t want you to overextend yourself. They need to know
if you are financially able to repay the loan as agreed. Your ability
to repay is verified by the following factors.
- Employment: Lenders need to check your current employment
to determine your prospects for continued income. Mortgage companies
prefer for you to have been employed at the same place for at least
two years, or at least be in the same line of work for a few years.
- Debt-to-Income Ratio: Lenders don’t want your
mortgage payments and other debt payments take up too much of your income.
The Debt-to-income ratio is the percentage of your gross income that
will go toward the mortgage and toward all debts. In approving loans,
many lenders follow several standard debt-to-income ratios, called the
qualifying ratios, which determines how big a loan you can get.
- Related articles: How
much House Can You Afford?
2) Willingness to Repay: Are you willing to pay back this loan?
Being able to repay the debt doesn’t mean you will repay the debt.
Lenders also want to know if you are willing to repay your loan. Your
attitude toward your credit obligations is often seen as the most important
factor in predicting whether you will make regular payments and repay
the loan on time.
- Credit history: Your credit history shows how you
have handled your financial obligations. Your lender needs to check
your credit report to see how you have managed your past debt. Your
credit report is a record of your credit history, maintained and sold
by a credit bureau.
- Residency and employment: Your length of residency
and employment help lenders develop a feeling of your personal stability
Bad credit is one of the major reasons mortgages
are denied. If you are even starting to think about buying a house
in the future, you need to maintain your good credit. Check your credit
and if your credit rating is not what you would like it to be, begin
now to clean up your credit.
More info: Credit
Repair
3) Capital
How much money do you have? Even though you get a loan to purchase a
home, you need enough money to cover the down payment, the closing costs,
and some more for reserve. Lenders want to know if you have the capital.
- Down Payment: The down payment is usually figured
as a percentage of the purchase price. Lenders consider that the more
down you put the less you are likely to forfeit on the loan, because
you have bigger stake in your home
- Cash Reserve: Lenders want you have enough cash or
other liquid assets to provide a few month reserve to cover your living
expenses in the event of an emergency.
Related article: Mortgage
Down Payments
4) Collateral
What can the lender get from you if you default on the loan? They will
take the home and sell it to cover the debt through foreclosure. For this
reason, they need the appraisal to ensure the house is worth the amount
you are paying.
- Property Appraisal: Lenders must find out what the
house you want to mortgage is currently worth by getting an appraisal,
a written report prepared by an appraiser. This could be the final stumbling
block if the appraised value falls below the purchase price. You may
have to increase your down payment to have the mortgage approved.
- Down-payment: Collateral is also measured by the
size of your down-payment in the event of a purchase, or the amount
of equity you have in your property in the event of a refinance. More
of down payment lowers the lender’s risk of being unable to collect
enough money in case of foreclosure.
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