How do Banks Determine if You Qualify for a Mortgage?

Qualifying for a mortgage loan can be a complicated process that takes weeks of meetings or a simple process that takes only a few hours. The difference depends on how prepared you are for the qualification process. Knowing how a mortgage company looks at a borrower for a home mortgage loan can help you to prepare for that first meeting. It can also help you show your finances in the best light possible to add to your chances of getting the loan.

1) The first thing a loan company will evaluate is your household income and expenses. After subtracting your expenses from your income, the lender will compare the remainder to the expected amount of each mortgage payment. For most approvals, the lender will want your mortgage payment to be less than 28 percent of your gross monthly income.

2) The next thing lenders check is your employment history. You’ll need to show that your income is stable and large enough to make the payments. Holding the same job for two or more years is preferred, as it shows that your income is unlikely to change immediately after the loan is given.

3) Your credit history is next on the lender’s checklist. Your credit score will show the lender how you handle making regular payments on your bills. Higher scores result in more favorable interest rates. Small problems in your history are acceptable, but larger events in your credit history, such as a foreclosure, will have a negative impact on the qualifying decision. Lenders are looking for scores at or above 730.

As a final qualifying check, the lender will look into your existing collateral. The more you have available, the better risk you are as a borrower. For existing homeowners, for example, a home with significant equity in it is a good source of collateral toward a new home purchase, while a home in the process of a short sale counts as a liability.

The lender goes over the information collected concerning your financial position and decides if you’re able to pay back the loan or not. If your income, job history and credit score meet the lender’s standards, you are likely to qualify for a loan at a mortgage interest rate that keeps your monthly loan payments reasonable.

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