You’d agree that you’re more likely to lend money to someone with a track record of early repayment. This is the same with mortgage lenders. They are more likely to consider financially disciplined applicants with a track record of positive decisions. If you’re planning to approach a mortgage lender, the least you can do is research what they consider and how they assess applicants. McKay Wood offers a deep dive into what lenders look for when deciding on mortgage applications.
The following are the important considerations mortgage lenders make before approving an applicant’s request.
Lenders want to know the level of risk they’re taking on each mortgage applicant. One of the best ways to assess that risk is through the applicant’s credit score.
The credit score is a reflection of the applicant’s financial discipline. It considers the applicant’s borrowing habit and how they repay those loans. Applicants with a high credit score are more likely to be considered faster than others. A good credit score can also qualify applicants for better interest rates and repayment plans.
As an applicant, it is best to work on building your credit score before applying for a mortgage loan. You can also request your credit score from the major credit bureaus to assess where you stand.
Applicant’s income and employment history
Mortgage lenders understand the relationship between an applicant’s income and their ability to meet their minimum monthly repayment. Applicants with solid employment history and good income progression are more likely to be considered faster than others.
Proving that you have sufficient and consistent income also tells the mortgage lender that you can follow through with the payment plan.
Lenders may also set certain income thresholds for certain demands. For example, a person with a higher income can request more money to buy a home knowing they’ll be able to keep up with the payments.
Applicant’s debt-to-income ratio
It is not enough to earn a huge amount monthly. Lenders want to know if you have outstanding debts that may conflict with your mortgage payment. The debt-to-mortgage ratio tells the lender about your monthly debt obligation as a percentage of your income.
You’re likely to have a hard time securing a mortgage loan when your debt-to-income ratio is high. Generally, a 43% debt-to-income threshold is the standard. Anything over 43% may not be accepted for consideration by the lender.
Some applicants may be lucky with their mortgage application, especially when they can demonstrate that the debt they’re servicing is almost fully paid off.
Mortgage lenders are interested in having a guarantee that can be banked on if the homeowner defaults. This guarantee is usually in the form of collateral.
Such loans involving collateral are known as secured loans. Secured loans require the applicant to provide properties or assets whose value is equal to or more than what is being borrowed.
Borrowers who can provide valuable collateral may be able to access home loans faster due to the low risk attached to their demand. The lender can easily recoup their money from the collateral should the borrower default on the agreed payment.
Size of down payment
As a borrower, the size of your mortgage down payment can make a difference in your application. Borrowers with a high down payment reduce the financial weight on themselves and encourage the lender to consider their application favorably.
To improve your chances of getting a mortgage approval, ensure that you’ve carefully planned your finances. Save as much as you can and pay as much as you can as a down payment.
The higher your down payment, the lesser you have to pay, and the faster you can pay off your mortgage loan.
Applicant’s liquid assets
Lenders are overall interested in how much a borrower is worth, their financial behavior, how they respond to debt and repayment, etc. Their interest in the applicant’s financial life spans to the applicant’s liquid assets, including savings.
Borrowers with a healthy savings account and savings profile are considered to have a safety net to keep them afloat when financial problems arise. Such a guarantee encourages the lenders to approve the applicant’s mortgage application faster.
The loan term is also a huge consideration before approval. Mortgage lenders understand that the applicant’s financial status may not change in a year or two. But it can change in five to ten years. They want to be sure that they’re granting home loans to people who have a higher chance of positive financial life in the future.
People who are deemed to be at risk of financial instability may have a hard time getting a mortgage approval for their home loan needs. However, they can increase their chances with other solid financial records.