What Do Mortgage Lenders Look For?

Buying a home is an exciting step, but it can also feel very overwhelming, especially if it’s your first time buying a home or you just aren’t sure what to expect throughout the mortgage loan process. Lenders look at your overall financial profile when reviewing your mortgage application, not just your credit score. It’s important to know what other factors mortgage lenders look for so you can know where you stand when applying for a mortgage loan.

Character

Your overall credit behaviors are an indicator of your financial character and will help lenders determine your individual risk factor. Beyond your credit score, a lender will look at your full credit report and analyze the following:

• Credit Applications: Lenders will check to see if you’ve recently applied for other loans or credit accounts. Several new applications close together looks risky to lenders, so try to make sure you plan ahead and space out your applications.
• Payment History: Lenders will also check your payments on other loans, credit cards, lines of credit, or any other account on your credit report. Consistent on-time payments look good to lenders, as it indicates you will be a responsible borrower.
• Negative Marks: Any negative marks on your credit report make you appear risky. These include bankruptcies, foreclosures, delinquent accounts, collections accounts, charged-off accounts, etc. While one derogatory might not be a deal breaker, it can affect your interest rate.
• Dispute Statements: Lenders will check for existing or pending dispute statements on your report and may view them negatively. If you have a pending dispute, it’s best to get that fully resolved before applying for a mortgage loan. Lenders want to see the true picture of your credit, without a dispute casting a shadow. Additionally, a pending dispute can delay the mortgage underwriting process.

Capacity

In terms of credit, your capacity indicates your financial ability to repay your mortgage loan, and is calculated by factors like your income and employment. This information is often verified, and lenders may even contact your listed employer, so ensure the information listed on your loan application is accurate. Correct information also helps you have the best chance at being approved for the loan that’s right for you.

• Income: Your income is a major factor. Lenders view borrowers who have a stable, predictable income as lower-risk, as that makes it easier to know the borrower will be able to make their payments each month.
• Employment: Even if your income is high enough to qualify you for a great interest rate, lenders may request to review a few months’ worth of pay stubs or review your employment history over the last few years. Lenders like to see proof that your income and employment are stable and consistent. This doesn’t mean you have to have had the same job for the past 5 years, but if your employment is inconsistent or you were recently unemployed, you might not be denied for the loan, but you may be charged a higher interest rate to make up for the lack of stability.
• Debt to Income Ratio: Lenders use this metric to gauge your level of risk when it comes to taking on new debt. This ratio is calculated by adding the total of all your monthly debt payments (including loan payments, credit card payments, and other monthly financial obligations such as child support or alimony payments), then dividing that total by your monthly income before tax. If your debt-to-income ratio is higher than you’d like it to be, the best way to lower it is by paying off your existing debts. If you feel like your current loan payments are too high, consider a refinance to free up some extra space in your monthly budget.

Capital

Your capital is the money and assets you still have after buying a home. Capital is an important factor to consider because even though buying a home is probably the largest financial purchase you’ll make, lenders don’t want to see that you’re wiping out your account to buy a home. Having high-value assets makes you look less risky to lenders, as it indicates your ability to make a larger down payment and pay your mortgage each month.

• Investments: This includes retirement accounts, stocks, bonds, mutual funds, trade funds, and any real estate or other properties you own.
• Cash Assets: This entails your financial accounts including your checking, savings, and any certificate accounts you have.
• Down Payment: A larger down payment will help you score a lower interest rate. The lower the amount you have to take out for the loan, the less risky you appear to lenders. But remember, a down payment is only part of buying a home, and you don’t want it to clean out your bank account. It’s important to make sure you still have funds left over to make your mortgage payments on time each month, cover the costs of home maintenance and any necessary repairs, or recover from any financial setbacks or unexpected emergencies.

Collateral

Collateral is something of value pledged to secure the repayment of a loan, and will be surrendered in the event that the loan defaults. With a mortgage loan, the collateral is usually the home itself. This means that the lender can seize the home if the borrower is unable to repay the loan.

Conditions

While the other 4 Cs listed above are factors that are personal to you, the fifth C includes external factors that make up the bigger picture of mortgage loans and homeownership. Lenders will consider the current circumstances in your area and nationwide and how that affects your mortgage.

• Market Conditions: The real estate market is very local, so it helps to have an understanding of the supply-and-demand in the areas and price points you are interested in. Knowing how many homes are currently on the market in your area and whether it’s a “buyer’s market” or a “seller’s market” will help you understand if you are in a position with the upper hand or if you may have to leverage a little bit more.
• Cost of Living: This includes the cost of basic living expenses such as food, groceries, housing, utilities, transportation, healthcare, taxes, etc. The cost of living varies from place to place and can be much higher in some cities than in others. While cost of living doesn’t have a direct impact on your mortgage rate, if you’re looking for homes in an area with a higher cost of living, that just means that you may have to devote more of your income toward other housing expenses.
• Interest Rates: The overall level of mortgage loan interest rates is set by national market factors. Rates fluctuate daily, based on overall economic conditions including inflation, unemployment, job growth, and other economic indicators like earnings, sales, and stocks.

In addition to the 5 Cs covered above, there is one final C that is considered in lending decisions: confidence. Your lender needs to feel confident that you will be able to repay your debt, and the 5 Cs of credit give a good indication of your ability. Knowing what factors mortgage lenders look for will also give you confidence as you make a major financial decision. Use your knowledge to help you prepare to find the home and the mortgage loan that will best fit your life and your finances.

Let the mortgage team at Robins Financial help you make your dream home a reality. Visit our Mortgage Loan Center to learn more about the mortgage process, and check out our Home Buying Calculators to get a picture of what your home loan will look like in terms of down payment, monthly payment, and more. Apply for a mortgage loan online or set up your appointment to speak with one of our Mortgage Loan Officers.