A mortgage is a one-time loan that allows you to buy a home without paying its full price upfront. Getting a mortgage involves six steps: pre-approval, house shopping, the mortgage application, loan processing and underwriting.
Mortgage lenders make sure you qualify for a loan by reviewing your financial background and discussing things like debt-to-income ratio. This article covers what lenders look at and the documents you’ll need to provide.
Credit History
Lenders want to know that you’ve been able to pay off other loans in the past before lending you money to buy your own home. This is why most mortgage lenders require a credit score — a number that tells them how well you’ve managed your debt.
Mortgage lenders usually favor borrowers with credit histories that are at least 7 years long. Those with shorter histories may be at risk of being denied a loan unless they can establish a credit history with some other method, like becoming an authorized user on someone else’s account or taking out a student or co-signed credit card.
To improve your credit scores, focus on paying down debt and limit the number of credit inquiries you make to avoid lowering your score. Also, when shopping for a mortgage, only compare rates within one window to prevent your credit scores from dropping in response to multiple rate inquiries. Credit scores can vary between credit bureaus, so you’ll need to check your credit reports from Experian, Equifax and TransUnion before applying for a mortgage.
Employment History
The employment history of borrowers plays an important role in the mortgage approval process. Lenders typically verify employment through verbal or written requests to the borrower’s employer. They may ask about the job title, hours per week and the likelihood that the borrower will continue to work at their current employer.
Generally, lenders want to see two years of steady employment. However, some loan programs will allow a shorter history. Borrowers who are recent graduates from college or trade school can use their full-time period in school as part of their employment history, as long as the degree is related to the borrower’s profession.
Frequent job changes that don’t reflect professional growth or show a stagnation or decline in pay can hurt a borrower’s ability to obtain a mortgage, as well as any gaps in income. A COVID-19-related gap in employment, such as those that occurred during the pandemic, is often less detrimental than a job change that would not have been made due to the economy or the field of work.
Assets
Some lenders allow you to use your assets in lieu of income when qualifying for a mortgage. These are called asset based mortgages and they are typically reserved for self-employed borrowers, real estate investors and those with sizable monetary investments.
You’ll need to submit documentation showing the value of your assets as well as bank statements, brokerage statements and appraisal reports to verify that they are actually yours. Lenders will also look at your overdraft history to make sure that you’re not spending more than you have in the bank.
It’s important to season your assets for a few months before you apply for a mortgage. Many borrowers try to shuffle money into their own accounts to qualify for a loan, but lenders will scrutinise this and ask for proof of how the funds were sourced and seasoned. This could derail your application. Instead, approach a specialist high net worth mortgage broker who has access to a wide range of private lenders that offer this type of financing.
Debts
When assessing mortgage applicants, lenders look at your debt-to-income ratio to determine whether you can afford the monthly repayments. This is calculated by adding up your debt payments (including credit card, auto loan and student loans) and dividing them by your pre-tax monthly income.
Lenders will also check your payment history on existing debt and credit cards to see how punctual you have been. If you have had some recent late or missed payments, you should be prepared to explain the circumstances and provide any documentation that supports your case.
You will need pay stubs, tax returns and investment statements for properties or other assets you hold. You should also have a copy of your bank statement to show your readily available cash and savings.
This includes checking and savings accounts as well as money market, IRA, stock, bond or mutual fund statements. The more documentation you can have on hand to support your application, the more likely it is that you will be approved for a mortgage.
