How does a lender decide whether to approve a mortgage?
Here are the factors that count the most.
When it comes to a home loan, it’s gross monthly income (your pay before taxes) that is the starting point for determining your ability to make mortgage payments. Generally, lenders look for two years of stable income. If you want to count commissions or bonuses, you need to be able to show some history of receiving such payments regularly. Self-employed borrowers will need to provide financial statements and tax returns to verify income.
Installment debt (car payments, credit card payments, personal lines of credit, etc.) are added together with your proposed mortgage payment to determine your ability to qualify for the loan. Credit card payments are figured using the minimum monthly payment. If a debt is scheduled to be paid off within a few months, it may not count toward your total monthly debt for qualification purposes. General guidelines suggest that a home loan payment not exceed 33% of gross monthly income, and that a mortgage payment plus all debt payments not exceed 43% of gross monthly income. Other factors, such as larger down payments, may allow for approval at higher percentages of gross monthly income.
“Stability” is the key word here. If you just landed that big job last month, or you tend to change jobs often, your lender may be more cautious about figuring your income when qualifying you for a loan. In this case, they want to make sure you’re able to make your loan payment every month for years to come.
Numerous late payments on debt, or a credit report that indicates a lack of ability to use credit wisely are red flags for a lender. You may find you need to settle any outstanding collections, or wait several years after a foreclosure or declaring bankruptcy before you can qualify for a loan. At the same time, one or two minor mishaps on your credit report that can be logically explained are usually not cause for alarm.
In this case, the lender wants to make sure that the value of the property would more than cover the loan amount if it had to be sold following foreclosure. To accurately gauge the value of the property, the lender hires an appraiser who inspects the property and prepares a report comparing the value of the property with others in the area which have recently sold. If for any reason you fail to make your loan payments and the lender has to take the property back, they want to “break even” on the sale of the property. Note that the appraised value and the purchase price may not always match.