Wondering how strong your mortgage application is? Here's what lenders look for...
Let’s talk about how to make sure you stay at the top of the borrowing-ability game. Mortgage lending is simply risk assessment, and lenders are constantly scrutinizing the risk of lending out hundreds of thousands of dollars and how that one application affects their overall portfolio of lending.
Below is a list of the most common application elements that lenders pay attention to that may add or detract from the strength and likelihood of your mortgage application being approved.
The 5Cs of lending
- Credit (past repayment habits)
This is a big one; the lender will be looking at your credit score and credit history to determine your previous repayment habits. How you pay your $1,500 credit card balance helps your potential mortgage lender judge the likelihood that you will pay your mortgage on time. If you have great credit, yay! If you have some bruised credit in the past, it’s not a huge deal; just make sure you have some good credit history to mitigate your hiccups from the past. Not only is how you have paid your credit important, but the length you have had it and how much you owe in relation to available limits, as well.
- Collateral (your home is the lender's house)
Your potential lender will want details on the property they will be financing - i.e. what kind of shape it’s in, location, and whether it's a property that is appealing to a large portion of the population. For instance, is it a single family home located on a cul-de-sac in a major city? Or is it a 10-acre farm with two barns and a shop located 10 kms from Vegreville? A lender's ideal property is in good condition and located in a desirable location. That doesn’t mean it is a minimum requirement for approval; it just means the lender will be looking a little more closely at the other strengths of your application if the location and home are less than optimal.
- Capacity (how are you going to pay your mortgage)
Along with a mortgage approval inevitably comes a mortgage payment. It's no surprise that lenders would like to confirm how you will afford your mortgage payments. Depending on your employment type, the documentation requirements will vary. Most lenders are pretty common sense and are just looking to gain a comfort level with your income to ensure your mortgage payments are manageable for you.
This element of an application consists mainly of your down payment amount and whether your net worth is positive or negative. Simply stated, the more of a down payment you have, the better it looks. Also considered is your net worth - which equates to your assets minus your liabilities (for example, if you have $15,000 in cash, a car worth $5,000, and credit card debts totaling $10,000, your net worth is $10,000). If you have a positive net worth, it shows you have a bit of a cushion in the event of a cash-flow emergency. This looks more favorable than if you don’t have access to extra resources to make your mortgage payments in the event of an income sabbatical.
Character is the overall determining factor in determining if the mortgage application is approved or declined. It is up to your mortgage professionals to inform the lender what kind of person you are and whether you are a reasonable lending risk. If you don’t have a down payment, tell us about how you put yourself through school without student loans and bought your car in cash. If you have some bruised credit, let us know the reason. Was it a result of a relationship breakdown or an illness? Please tell us the story as it helps us paint a picture of what kind of borrower you are on and off paper.
How good do you look on paper?
The above things considered, how your whole application is structured also impacts the likelihood of approval. If you would like to find out how good you look on paper - or how you can look better - don’t hesitate to contact a mortgage professional for a detailed assessment of your financial profile from a lending perspective.
Content courtesy of http://www.goldengirlfinance.com/
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