3 Things Mortgage Lenders Look Beyond Your Credit Score
When you apply for a mortgage, lenders want to be sure that you will pay off what you owe. They look at the details of your financial situation to assess this likelihood.
Your credit score is obviously one of the most important factors that lenders look at. Your score provides a quick and easy way to assess how you’ve handled your debt in the past.
But most mortgage providers go beyond your credit to consider other key financial details as well. Here are three big things that can have a major impact on your chances of loan approval.
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1. Your debt ratio
Lenders want to know that you aren’t in too much debt and over-committing to payments you probably can’t afford. One of the ways they assess this is by looking at your debt versus your income.
Lenders actually calculate your debt-to-income ratio in two ways. The first, the “initial ratio,” compares housing costs to income. Housing costs include the principal and interest on your mortgage, property taxes, and insurance. Typically, lenders like this ratio to be less than 28%.
They also look at the back-end ratio, which includes the total amount of other the debt payments you have. They look at your monthly mortgage payment, the cost of property taxes and insurance, and all other monthly payments (including credit cards, car loans, personal loans, and any other obligations). The total amount of debt is then compared to your monthly income. This ratio should ideally be less than 36%.
If you have too much debt relative to your income, you will have fewer lenders to choose from and may need to borrow through a government guaranteed loan (like an FHA or VA loan) with relaxed requirements. Or you could be turned down for a loan entirely.
When you find that a high debt ratio is interfering with your borrowing capacity, you will need to reduce your debt repayments by paying off loans or buying a lower cost home.
2. Your employment history
Having a stable income is essential to paying off your loan on time. Lenders look at your employment history to assess the likelihood of you losing your paycheck.
Mortgage lenders like to see proof that you’ve been working for a while and have earned consistent income. If you’ve changed careers or your salary has fluctuated a lot, you might not get credit for what you’ve earned recently when lenders calculate your debt-to-income ratio.
To make sure that an irregular employment history doesn’t prevent you from buying a home, do your best to avoid changing jobs or experiencing a pay cut within two years of applying for a home loan.
3. If you have recently incurred debt
If you’ve recently taken on new debt, it can be a red flag to lenders, who may be concerned that you are borrowing. If you can, avoid new loans within a year of applying for a home loan.
By not taking on recent debt, maintaining a stable employment history, and keeping your total debt repayments at a reasonable percentage of your income, you can maximize your chances of getting a mortgage.