What Lenders Look At

How does a lender decide whether to approve a mortgage?  Here are the factors that count the most:

INCOME

The first item is how much of your total income you will spend on housing.  The lender uses this information to decide whether your new home will stretch your budget too much.  If the house payment is a big portion of your income, you're more likely to have trouble making your house payments.  On the other hand, if the house payment is only a small portion of your income, chances are better that you can truly afford the house.

You may think of your income as your take-home pay after taxes have been taken out.  However, when you're qualifying for a loan, a lender will use your gross income. That means all the money you earn before taxes, including overtime, commissions, dividends and any other sources as long as you can show a steady history for these sources.  For example, many lenders will count income from a part-time job as long as you can show that you've had the job for at least two years.

Your monthly housing expense as a percentage of you monthly income is called the housing expense ratio.  A good goal is to spend about a quarter (25%) of your income on your house payment ( including the mortgage, property taxes, mortgage insurance and hazard insurance  )  Although a mortgage lender will likely allow you a little more than this, make sure you are comfortable with the amount you borrow.

DEBTS

Another important factor is your level of debt.  Debts include your house payments on all loans, charge cards, child support, etc.  that you will make each month.  To afford a home, we suggest that your goal should be to spend no more than 36% of your monthly income on all your debts.  This percentage of debts to income is called the debt-to-income ratio.

EMPLOYMENT HISTORY

You don't need to be a doctor or a lawyer to qualify for a loan, but a history of steady employment in any occupation helps.  Mortgage lenders usually feel more comfortable lending money to people who have a consistent history of work in the same or related occupations.  You will be asked to verify your employment.  If you are self-employed or if you have been at your job less than two years, the lender may ask for additional information concerning your work history.

CREDIT

In addition to your ability to pay ( as indicated by your debts and income ), a mortgage lender will look at your willingness to pay.  Your willingness will be judged by your credit record to determine how well you've met your financial obligations in the past.  

THE  PROPERTY

When you choose a house, the lender will want to know that the house is worth the price you pay.  Lenders will not make a loan to you for more than the homes value.   Therefore,  lenders require a professional appraisal of any home before they finalize the amount they'll lend on a mortgage.