As a first-time home buyer, the process can be overwhelming to navigate. Maybe you’ve applied for loans before and were turned down.
Mortgage lenders are looking for specific information and want to know that you’re capable of paying a mortgage.
Once you know what they’re looking at, you’ll have an idea of areas you may need to improve before you apply again.
Read on to learn about the different factors that mortgage lenders consider when reviewing a loan application.
What do mortgage lenders look for on your loan application?
One of the first things that mortgage lenders will look at is your credit score.
This number gives lenders an idea of how likely you are to make your payments on time and in full. If you have a lower credit score, you may still be able to get approved for a loan, but you may end up with a higher interest rate.
In addition to your credit score, lenders will also look at your employment history and income. They want to see that you have a steady job and that you’re making enough money to cover your mortgage payments.
They’ll likely also require some documentation, such as pay stubs, bank statements, or tax returns, to verify your income. It’s good practice to submit what they ask for, right away, so as not to delay the process.
Your lender will also look at any outstanding debts you have, such as credit card balances or other loans, to get an idea of your financial obligations.
They want to know what assets you have, such as savings or investments, that could be used to cover the cost of your home if you were to default on your loan. Basically, they want to get a full picture of your financial situation.
Now that you understand the basics, let’s dive into the details you’ll provide during the application process.
What is a bank statement?
A bank statement is a document that shows all the activity in your checking or savings accounts over a set period of time, usually one month.
This can include deposits, withdrawals, fees, and interest earned. Bank statements can be useful when you’re trying to track your spending or save for a specific goal.
Why do lenders need to see bank statements?
Mortgage lenders typically require two types of bank statements when you’re applying for a mortgage loan:
- Personal bank statement that shows all your deposits and withdrawals over the past month. This can be either a physical copy of your statement or an electronic version.
- Business bank statement if you’re self-employed. This will show your income and expenses for your business over the past month.
Lenders use bank statements to verify your income and to get an idea of your spending habits.
They’ll look at how much money you have coming in and going out, as well as what kinds of expenses you’re paying for. This information can help them determine whether or not you could realistically afford a mortgage.
How to access your bank statements
If you have a checking or savings account, you can typically get your bank statements by logging into your online account or visiting your local branch.
If you don’t have an online account, you can usually request copies of your statements by calling your bank or visiting a branch in person.
Some banks may charge a fee for physical copies of your statements, so be sure to check with your bank before requesting them. You can also ask for electronic versions of your statements, which are usually free.
When you’re applying for a mortgage, make sure to have the most recent copies of your bank statements on hand. Lenders will typically require copies of your statements from at least the past two months, so be sure to have these available.
What do underwriters look for in your bank statements?
Underwriters will carefully review your bank statements to look for any red flags that could indicate financial problems. They’ll look for things such as:
- Large deposits or withdrawals that don’t match up with your income. This could be a sign that you’re using credit cards or other loans to cover your expenses.
- Repeated overdrafts or bounced checks. This could indicate that you’re having trouble managing your finances.
- Unusual fees or charges. This could be a sign of fraud or identity theft.
- Large cash deposits. Lenders may be concerned about where this money came from and whether or not you’ll be able to repay the loan.
If you have any of these items on your bank statements, be prepared to explain them to your lender. They’ll want to know the reason for the large deposit or withdrawal, and they may require documentation to prove that the money is legitimate.
What do underwriters look for in your credit report?
Underwriters will also pull your credit report when you apply for a mortgage.
This report includes information on your credit history and current debts. Underwriters will use this information to determine your creditworthiness.
They’ll look at things like your payment history, credit utilization, and any outstanding debts you might have. They’ll also look at the types of credit accounts you have, such as credit cards, student loans, or car loans.
You can get a copy of your own credit report, for free, once a year, from each of the three major credit bureaus. Checking your report yourself will allow you to catch any errors and dispute them before you apply, or clean up any overwhelming debt.
Credit utilization
One of the things that underwriters will look at is your credit utilization ratio. This is the amount of debt you have compared to your credit limits.
For example, if you have a credit card with a $1,000 limit and you owe $500 on it, your credit utilization ratio is 50%.
Ideally, you want to keep your credit utilization ratio below 30%. This shows lenders that you’re using a small portion of your available credit, which is a good sign.
If your ratio is too high, it could indicate that you’re struggling to make payments on your debts.
Payment history
Your payment history is another important factor that underwriters will look at. This is a record of whether or not you’ve made your payments on time.
Lenders want to see that you’re capable of making timely payments, as this is a good sign that you’ll be able to repay your mortgage every month.
If you have a history of late payments, it could make it difficult to get approved for a loan.
Lenders may require you to explain any late payments on your credit report. They may also require you to have a higher credit score or make a larger down payment.
Credit inquiries
Hard inquiries are requests for your credit report from lenders, landlords, and others. Inquiries can stay on your credit report for up to two years.
Too many inquiries can indicate that you’re struggling to get approved for credit. It could also mean that you’re taking on too much debt. Lenders may be concerned that you won’t be able to repay your debts if you’re already having trouble getting approved for credit.
If you have a lot of inquiries on your credit report, be prepared to explain them to your lender. They’ll want to know the reason for the inquiries and whether or not you’ve been approved for credit.
Debt-to-income ratio
Your DTI ratio is the amount of debt you have compared to your income.
For example, if you make $2,000 per month and you have $1,500 in monthly debts, your debt-to-income ratio is 75%.
Ideally, you want to keep your debt-to-income ratio below 43%, though this may vary by lender. Lenders will use your DTI to show that you have enough income to cover your debts. If your ratio is too high, it tells lenders that you don’t have enough income coming in to cover your current debt and expenses.
Lenders may require you to lower your debt-to-income ratio if it’s too high before you can be approved for a mortgage.
This may mean paying off some of your debts, such as credit cards or car loans. You may also need to get a cosigner for your loan if you can’t lower your ratio on your own.
Applying for a mortgage as a first-time buyer
Now that you have an idea of what mortgage lenders and underwriters are looking for to approve a loan, you’ll know what to work on.
Since you now know that your credit score and report are big factors for your approval, grab a copy of your report and start working on improving them so that they’re in the best shape for lenders.
Loan requirements will vary depending on your lender, however, these are the basic areas that all lenders look at. Be sure to be open and honest with your lender if you have questions about your application.
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