Buying a home is arguably one of the biggest purchases you will ever make in your life. While some people are lucky to pay for their first home in cash, many first time buyers have to obtain a mortgage to help them finance their purchase.
To qualify for a mortgage, there are certain factors lenders look out for when reviewing the borrower application. Off the top, they look for positive credit history, steady income, low credit utilisation ratio among other things.
To help you have an overall view of the specific things that matter to mortgage lenders, read through the sections that follow.
As with any lender, mortgage lenders are interested to know if you are responsible enough in meeting your financial obligations. They will scrutinise your credit report to check if you are on track on all your payments on facilities such as lines of credit, loans and credit cards.
Any payment that you have missed or made late in the past may raise a query as the lender may want to know the underlying reasons.
Recent Credit Applications
Any time you apply for a credit facility, your lender may conduct a soft or hard check. Hard checks normally appear on your credit file and the more the checks, the higher the probability that your credit score will take a hit.
Mortgage lenders are keen to note the kind of applications you have made so that they can know what other forms of debt you are taking up. Too much debt may make you a credit risk or indicate financial trouble.
Credit Utilisation Ratio
Mortgage lenders look at the credit that is available to you and how much of that you are currently using. Using these numbers, they can calculate your credit utilisation ratio. Generally, if you are using more than 30% of your available credit, most lenders will see you as overleveraged hence a riskier borrower.
Ensure you maintain your ratio below 30% for a healthy credit score and chances of favourable mortgage facilities. In other words, if your credit card has an available limit of £10,000, ensure your card balance is always under £3,000.
Pending Credit Report Disputes
While disputes on credit reports could mean that you are trying to resolve an error, most lenders look at such disputes on your statement negatively. The mortgage underwriting process usually follows a logical path and a dispute can hold or temporarily halt this process. They often wait for the dispute to be resolved before progressing with the rest of the steps. It, therefore, helps your credit report is clear before approaching a lender.
Being an Authorised User
Many people with new credit often piggyback long term credit card users to help them build their credit. This works especially if the principal cardholder makes payments in time and doesn’t exceed their card limit.
If you are an authorised user, it will appear on your credit file and mortgage lenders will take note of this in making their loan assessment decisions. The credit card activity for the main cardholder will appear on your credit card report and if they have been inconsistent or irresponsible with their card usage, it will appear on your file. Having said that most lenders don’t attach much weight as they are more interested in accounts where you are the primary holder.
Bankruptcies and Court Judgments
Negative marks from delinquent accounts, court judgements, charge offs, bankruptcies, and partially settled accounts make you look like a riskier borrower. Ensure you clean up your financial profile and resolve any outstanding accounts in full before approaching a mortgage lender.
The lender may either reject your application or approve your loan, but at a higher interest because of your checkered credit history.
Debt to Income Ratio
Before approving your mortgage, your lender will do a comprehensive assessment of your income. Much like any other lender, home loan lenders prefer borrowers with predictable and stable incomes. They will assess your income from formal employment as well as additional income from invested assets.
Among the metrics they will look at is your debt-to-income ratio. This ratio gives a clear indication of your monthly income and how much of it goes towards servicing your debts. A high ratio means you are overleveraged and may not have the financial space to take on additional debt. Where applicable, lenders may contact your employers directly to verify your income documentation.
A Listing of Your Assets
The assets that you have including cash deposits are of interest to a mortgage lender. Generally, assets represent your earning power and the more the merrier. On the mortgage application, some lenders will request that you list assets such as savings accounts, checking accounts, certificates of deposits (CDs), and any investment that you may have.
If you have high-value assets, the lender gets the assurance that you can be able to repay the mortgage to be advanced to you. Even if you lose your job or get an emergency, your assets can stand in as good collateral for your facility.
The Down Payment on Your Mortgage
A standard down payment percentage that will give you the best loan interest is 20%. The lender will often look at how much you are willing to put as a down payment to assess the loan cost. It is possible to get some conventional loans with lower requirements for a down payment but generally, it helps to up your down payment.
If you do not have enough savings, you can shop for loans now that will give you that extra boost to make a significant down payment.
Mortgage lenders look at different things when assessing your eligibility for a home loan. However, most of those factors are based on your credit report. Therefore, before applying for a mortgage, ensure you get your credit reports from all the 3 main credit rating agencies to know where you stand. With a few simple steps, you can improve your score thereby giving you enough leg room when applying for mortgage facilities.