For most Americans, buying a home is the most expensive purchase of their lifetime, and obtaining a mortgage can be particularly stressful.
Here are key factors lenders may consider when reviewing your mortgage application.
Credit report & score
Your credit report documents your track record of borrowing from and repaying banks, credit card companies and other lenders. It’s crucial that you check your credit report well in advance of a home purchase in order to give yourself enough time to spot any issues that might raise concerns.
Your credit score is a numeric evaluation of your credit risk level. Lenders will review your credit report and score, among many other factors, to make a decision about whether they will approve your home mortgage application.
Credit cards & other debts
Your debt-to-income ratio, or the amount of credit card and other debt you have compared to your income, is also calculated before securing approval from a lender. If you’re carrying a balance owed on your credit cards and other debts, it may impact your credit score.
Experts suggest that consumers should be especially aware of their credit card charges during the months leading up to a mortgage application. Think twice before canceling a credit card, especially an account that establishes a long-term credit history. You’ll also want to avoid applying for new credit during the three to six months prior to applying for a mortgage.
The length and terms of your employment will also be verified by lenders to ensure you bring in enough income to afford a mortgage payment. Whether you’ve been in your position of a long period of time, have multiple sources of income or are self-employed, it’s especially important to have the right paperwork to share with lenders.
Be prepared to provide pay stubs, bank statements and tax returns in order to verify your work history.
The expected down payment can be up to 20 percent or more of the home’s purchase price. If your credit history is less than stellar, you may need a larger down payment in order to secure a loan. Down payment requirements vary by lender and loan type, so be sure to verify the required down payment with your preferred lender.
Your lender will also want to know that you have enough cash to cover your closing costs; if you don’t, you might have trouble getting your application approved.
Know what’s off-limits
When deciding whether to extend you a loan, lenders might ask countless questions about your income and expenses. They can ask whether you’re involved in any lawsuits, have filed bankruptcy in the past seven years or been involved in a foreclosure.
The Fair Housing Act and other federal laws, however, put some questions off-limits. Borrowers, for instance, are not required to disclose payments from a spouse or former spouse unless that income is being used to qualify for the mortgage. Lenders cannot ask how much you receive in child support or alimony, but they can ask if you want to disclose this amount because you’d like to use the income to qualify for the mortgage. If you pay child support or alimony, your lender typically will require this information because it affects your ability to repay the loan.
Lenders can’t ask if you’re pregnant or planning a family, but they can ask about your dependents and their ages.
Also, thanks to protections provided by the Fair Housing Act and Americans with Disabilities Act, you cannot be asked if you are ill or disabled.
The mortgage loan application process can be daunting, as lenders need to gather a considerable amount of information to determine whether you’re a good investment. Knowing what lenders look for should help put you at ease and ensure that you’re well-prepared for securing the financing you’ll need to buy your home.
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Written by Becky Frost, Senior Manager of Consumer Education for Experian Consumer Services. Experian Consumer Services offers credit monitoring products like freecreditscore.com™, which has resources and calculators that help you understand how credit can impact your life. Credit is an important component when buying, renting or refinancing your home.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.