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The house hunting process is stressful enough on its own. You don’t want to find your dream home and have the financing fall through. By learning what mortgage lenders look for when they look at your credit report and financial details, you can increase your chances of getting the loan you want.
Mortgage lenders want to make sure you can pay back the loan without struggling, and one way they calculate that is through your debt-to-income ratio. They compare your debt load, including the potential mortgage, to your income. The typical lender wants to see a ratio that’s below 33 percent. Some mortgage underwriters will allow up to 43 percent in certain circumstances. The lower your ratio is, the better. You can reduce your ratios by paying off credit cards and existing installment loans before you start to shop for a mortgage.
Lenders want to confirm that you’re fulfilling your current financial obligations, or have sound reasoning as to why an account is past due. Your credit report shows the lender your payment habits with other creditors. If you have late payments due to financial problems in the past, you won’t be automatically disqualified from a mortgage. For example, if your credit card bill had a late payment due to an automatic payment failure, the lender may see a 30-day late listed on your report. If you have a pristine payment history following this situation, you’re unlikely to have a lot of problems.
The lender looks at your credit score as part of the qualification process, but they’re more interested in the factors influencing that number. Your report shows whether or not you have responsible credit usage through the age of your accounts, your credit card utilization and whether you have derogatory marks on your report. If your credit score is not where it needs to be to get your optimal mortgage, you may want to look into credit repair to get your score into the healthy range.
Your existing financial assets are considered during the mortgage loan. The amount of savings and other financial vehicles come into play for the qualification process. Depending on how much you have, you may be able to compensate for problems such as a thin credit file or a lower credit score. The lender’s primary goal is making sure you can pay your bill every month, for the next 15 to 30 years. If you have a substantial amount in your checking, savings and investments, then they can find some wiggle room when it comes to qualification.
When you offer a larger down payment, your lender takes on less risk when extending you credit. The minimum amount that you have to contribute depends on the mortgage product you’re pursuing. Loans guaranteed by the Federal Housing Administration, for example, require a 3.5 percent down payment. Traditional mortgage products may request anywhere from 5 percent to 20 percent.
If you want to buy a property for investment or are trying to qualify for a jumbo loan, your down payment requirement may be significantly higher. A benefit of providing a 20 percent or greater down payment is that you don’t need to take out private mortgage insurance on your home. If you have a lower amount of your money invested in the property, the lender will request that you make a PMI payment until you reach a certain amount of equity. This additional payment could add up to 1.5 percent of your mortgage amount annually.
Mortgage lenders want assurances that you can afford the mortgage payments when you finance a house. You can make your application look more desirable by considering the points above and making sure that you are in a good financial position before you start house hunting.