There are multiple parts to getting approved for a home loan, but the first step is always the most important; getting an approved application from a lender. The lender will investigate three areas to determine a person’s worthiness to get a loan.
Capacity is another way of saying “ability to pay.” A lender will look at a person’s current income, their length of time at their current job and their other debts. The lender wants to make sure that the borrower can reasonably be expected to pay the monthly mortgage note while handling their other obligations.
As a general rule, the lender is looking for stability in the applicant’s income. A minimum of two years’ work history is reviewed. If the applicant has changed jobs within the past two years then the applicant should show that they have worked in the same type of job for two consistent years.
The credit report is possibly the most important part of the approval. Lenders want to see that a borrower has demonstrated the ability to repay debt and do so in a timely manner. Ideally, the lender would like proof that the borrower has made a similar payment as a mortgage such as a monthly rent payment or a previous mortgage.
As a rule of thumb, most lenders will scrutinize the most recent 12 to 24 month period of credit history. For people that have always paid their debts on time each and every month, this will not be a big deal. People that may have faced tough circumstances in the past and have been able to re-establish their credit will need to keep this timeframe in mind. If the most recent late payment occurred within the last 12 months it is a good idea to wait a few months before applying for a mortgage.
Next to credit, the collateral is highly important. The property being used for the loan needs to have a value that is at least equal to, or ideally higher, than the mortgage loan. The lender looks at every new loan through a worst case scenario. If the borrower cannot repay the debt, for whatever reason, can the lender take the property and sell it for the existing balance. This is one reason why conventional loans require a down payment. It lowers the balance of the mortgage and improves the odds that the lender can sell the property for the existing balance.
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