In order to buy one’s dream home, a mortgage approval is necessary for all but cash buyers. As a mortgages is a long-term financial commitment, it is important to not only obtain mortgage approval, but a mortgage which is affordable and fits personal needs. In order to secure the best mortgage deal with low interest rates, it pays to have one’s finances in excellent order before even applying. It is also necessary to have a steady job with the same employer and a proven income.
The most critical things which mortgage lenders take into consideration when considering mortgage applications are employment and income, credit history, down payments and debt-to-credit ratio. Borrowers can prepare in advance by paying down debt to improve credit ratios and working to improve credit scores to ensure they are in the top range. Borrowers are advised to check their credit reports and score at least six months prior to making an application, allowing the time necessary to increase the credit score.
Any erroneous information can be cleared from credit reports to improve the score, and borrowers who need to can comply with FICO guidelines to further improve their score. It is important that no new credit applications are made in the period before a mortgage application.
There are millions of potential borrowers who simply have no credit history, as they have never utilized credit. However, they have often had financial obligations which have been met in a timely fashion but simply gone unrecorded. Rental payments, utilities and child care expenses are not reported to the credit bureaus unless late.
Borrowers in this position should consider registering with PRCB a year prior to applying for a mortgage, as the PRCB with Fico Expansion Score can help them to establish a pattern of on-time regular payment history, which mortgage lenders will consider during the mortgage approval process.
Employment and income are crucial when lenders consider mortgage applications. They expect to see steady employees who can hold down a job within a certain profession. Net income should ideally translate into no more than 28% used for mortgage payments. Lenders will make an assessment based on the total amount of income used to repay both a mortgage and other current debts and obligations. It helps borrowers if they apply for a loan which is affordable to their income, rather than attempting to borrow too much.
Borrowers who can put down a significant down payment will be more favorably assessed. Down payments of more than 20% are best, as they also release the borrower from the necessity of paying PPI. A large down payment represents immediate equity in the property, which protects both the borrower and lender to a greater degree than low down payments, and makes borrowers more appealing to lenders.
Those who are considering applying for FHA loans will find that the requirements needed to obtain a mortgage loan are generally lower. FHA mortgages can be granted to previous bankrupts after just two years and to those with foreclosures after three. The down payments required are as low as 3.5%, and it is possible for those with no credit history to be considered.
Those who do have a credit history are not required to have excellent credit scores, and FICO scores as low as 620 will be considered. However, debt-to-income ratio is considered, and applicants are again advised to put their finances in order prior to application.
In order to have a good chance of obtaining a mortgage approval, advance preparation of finances is necessary. Knowing what lenders are looking for in applicants helps potential borrowers to present their applications forearmed with knowledge, rather than face rejection, which will further impair credit history.