There are tons of tips out there on how you can improve your chances of getting your mortgage approved. And it’s no surprise, either. Buying or selling a house can be a stressful time, especially for first-time home buyers, and the thought of your mortgage application being rejected is an added stress that you just don’t need.
In the near future, this stress may be reduced, according to an article published by Monster Lead Group discussing how “Machine learning and the resulting AI will make a high-stress and non-consumer-friendly process, like a mortgage, frictionless”, said Alex Kutsishin, chief marketing officer for Sales Boomerang.
But until super smart robots become the norm in the mortgage sector, we still have to deal primarily with human lenders. The key to getting your mortgage approved is understanding loan officers. What is it that they actually look at when assessing a mortgage application? We explore this question in this article to give you the inside scoop on getting your mortgage approved.
Getting Your Mortgage Approved – How To
What do loan officers consider?
It’s not as simple as having a solid credit score and a respectable income (although these are still important factors). Loan officers look at lots of different criteria when considering whether it is worth the risk of approving your loan or mortgage. Here are a few of the key factors.
Being in debt can be a black mark on your report card, but it doesn’t automatically disqualify you from getting a mortgage. What’s more important is your debt-to-income ratio (DTI). This considers your total monthly debt payments compared to your gross monthly income.
DTI is calculated by totaling your monthly debt payments and dividing this figure by your gross monthly income, multiplied by 100 to come up with a percentage. This calculation is used to assess whether you are capable of managing all of your monthly payments. A high percentage would be a red flag to lenders while lower percentages are more likely to get you approved.
Another ratio for measuring a mortgage lender’s risk is the loan-to-value ratio (LTV). This figure compares the amount of money you are looking to borrow with the total value of the house. Your LTV ratio can change over time, something we’ll come back to later in the article.
For example, if you are borrowing $180,000 for a property valued at $200,000, your LTV will be 90%. The remaining 10% represents the deposit you are putting down on the property. The higher your down payment is, the lower your LTV will be. This means less risk for the lender and better chances that they will approve your mortgage.
A high LTV doesn’t necessary mean you’ll be rejected, but approved mortgages with high LTVs are likely to have higher interest rates.
Too much shopping around for mortgages
It makes sense to shop around for the best rates when looking for a loan or mortgage, but be careful when doing this. When you apply for a loan or request a quote from a lender, they will perform a search on your credit file to check your credit history. These searches are visible on your file, so when you apply for your mortgage, the loan officer will see them.
If you have multiple searches within a short span of time that’s around the same time as your mortgage application, whether they’re from quotes for a mortgage, credit cards, or other loans, this can reflect badly on you. Lots of searches might indicate that you are desperate for a loan, which suggest that you are unable to make the necessary repayments and will make the lenders uneasy and less likely to approve your mortgage. Always try to make sure you have the best possible credit scores to get the best possible mortgage rate.
Some credit card companies offer “soft search” tools that allow you to find out if you are likely to be approved without putting this mark on your credit file. So, if you are in need of credit, look out for these instead.
Your current income is a strong indicator of whether or not you’ll be able to make repayments on time, but loan officers will typically look further into your employment history to assess your level of financial stability.
If you’ve been recently fired from a job, unemployed for a period of time, or are constantly jumping from one job to the next, this could raise red flags. Lenders may look at the previous 24 months of your employment history to determine how reliable you will be in terms of future income.
Likelihood of the value of the property going down
The value of a property can fluctuate a lot over the years, and for a variety of reasons. Changes in the state of the economy or the property market can see house prices rise or plummet, renovations made to a property can increase its value, and changes in the local area can have positive or negative effects, there are many factors at play.
If you have a mortgage on a property and the value of the property increases, then your loan-to-value ratio decreases. Any repayments you have already made on your mortgage will decrease the LTV even further. Since a lower LTV means less risk for the lender, they are hoping that the property value will increase.
A decreasing value could see the LTV rise above 100%, meaning the lender is more likely to lose money if you, the property owner, can no longer pay their mortgage payments. So, if an evaluation of the property shows that its value is likely to go down, this will lower your chances of getting approved. If you want to find out how at risk your property is for devaluation, check out these 10 most common things that devalue your house.
To sum up…
Don’t hang all your hopes on getting a perfect credit score, or give up completely just because you owe some debts. There are lots of different factors that contribute to the success of your mortgage application.
Try putting yourself in the shoes of a loan officer reviewing your mortgage application. Would you approve yourself? Think about the things they might pick up on as high-risk factors and work on improving these before you submit your application. Like with most things, preparation and knowing what you’re getting into are extremely valuable if your end goal is getting your mortgage approved to get your dream home.