The steps to purchasing a home begin long before you make that first call to the realtor. Getting your financial situation in order is actually one of the first issues you should address once you have made the decision to purchase a home. What does this entail? It entails an understanding of what the lender is going to be looking for when making the decision whether or not to lend you the money.
Each lender will base their decision on a variety of factors. While they all use similar criteria, the actual application varies from lender-to-lender. As a result, just because you are turned down by one lender does not mean that you will be turned down by every lender.
Primary Criteria
Income – Lenders will require verification of your income in order to help determine the amount of loan for which you qualify. In everything they do, lenders are trying to prevent you from foreclosing on your home. Therefore, they want to make certain that you can afford not only the mortgage but other aspects of home ownership. The type of verification they will request may be one or more of the following: W2, recent pay stub, or recent 1040.
Job History - Lenders tend to frown on job hopping so they will request information regarding your job stability. They might even request a letter of verification from your employer to confirm that the information you have provided is accurate.
Credit Report – Lenders will request a copy of your credit report. The credit report provides a great deal of information such as:
· Past payment history – Do you have a history of slow payments? Have you had any foreclosures or liens?
· Current level of indebtedness – Lenders will determine your debt-to-income ratio (which is the measurement of your debts compared to your income).
· Credit score – The credit score is basically a mathematical equation that is used to measure your credit worthiness.
Liquidity – Lenders want to know if you have any funds that are readily available. This might include: cash (savings), bonds, stocks and other short-term investments. Depending on other factors, a lender may require that you have a certain amount of funds available.
What can you do to make a difference?
Fortunately, there are steps you can take to improve the appearance of your financial situation prior to the lender’s investigation. Maintaining a stable job history, increasing your savings and other short-term investments, knowing the content of your credit report, and understanding your credit score are some of the most important issues for you to address.
Read all of the articles in the Qualifying for a Mortgage series in order to discover the actual steps you need to take to improve your chances of qualifying for a mortgage.
Qualifying for a Mortgage Series
Qualifying for a Mortgage - The Basics
Buying a Home Without a Down Payment
The Facts Regarding a Down Payment
Understanding Your Credit Report
Understanding Your Credit Score
Loan Prequalification and Preapproval
Have a question about mortgages? If so, post your question in the Home Finance forum today.
