Mortgage Application Assessments: What Lenders Look For

Applying for a mortgage can be a lengthy and stressful process, with lenders assessing your whole life and financial history. Lenders will look at your income, employment history, savings and monthly debt payments, and other financial obligations to make sure you can comfortably take on a mortgage. They will also check your credit score and history to assess your record of paying bills and other debts on time. Other criteria lenders use to assess your application include the type of property you wish to buy, your age, residency status, and expenses.

Lenders assess your income to determine your ability to make repayments

Lenders will assess your income to determine your ability to make repayments. They will look at your annual income, employment history, and work type to evaluate your income stability and likelihood of repaying your mortgage. Lenders typically request records from the last two years, including pay stubs, W-2s, and tax returns. They may also consider special-case income, such as bonuses, commissions, or overtime, provided you can document their consistency over two years.

Lenders will also evaluate your monthly debts and expenses to calculate your debt-to-income (DTI) ratio, which compares your monthly debt obligations to your gross monthly income. A lower DTI indicates that you have more disposable income and are more likely to handle mortgage payments. Lenders generally prefer a DTI below 43%.

Additionally, lenders will consider your savings history and cash reserves, including investments that can be converted to cash, such as stocks, bonds, or retirement accounts. They may also assess your credit score, which reflects your financial responsibility and history of paying bills and debts on time. A higher credit score may lead to lower interest rates on your mortgage.

Before applying for a mortgage, it is essential to prepare all the necessary documents, compare offers from different lenders, and ensure financial stability by maintaining consistent income and savings.

Your credit score and history are evaluated to assess your record of paying bills and debts

When applying for a mortgage, lenders will check your credit score and credit history to assess your record of paying bills and other debts. This is a standard part of the process and is known as a "hard credit check". This will give the lender a detailed look at your credit history and help them make an informed decision about your application.

Hard credit checks can have a small impact on your credit score, but this is usually minimal and temporary. Multiple hard credit checks in a short space of time can be a concern for prospective lenders, as it may indicate financial instability. Therefore, it is recommended that you limit the number of applications you submit and the frequency with which you apply for credit. For example, it is advised to wait at least three to six months between applications and to never apply for more than two or three things in the same month. Comparing mortgage rates for no more than two weeks is also recommended to limit the damage to your credit score.

Before applying for a mortgage, it is a good idea to check your credit score and report. This will help you identify any errors or signs of fraud that could negatively impact your score. It will also give you an idea of whether you need to take time to improve your credit score before submitting applications.

Your credit score can affect the interest rate you get on your loan and how much of a down payment will be required. A higher credit score may result in a better interest rate and more favourable mortgage offers. Successfully obtaining a mortgage and making timely payments can positively impact your credit score in the long run, as it demonstrates your ability to manage your finances and make regular payments.

Lenders will look at your assets and liabilities

Lenders will assess your assets and liabilities to determine your financial health and ability to handle mortgage payments. They will consider your net worth, which is calculated by subtracting your total debts from your total assets, to understand how much money you actually have. This includes looking at your checking and savings accounts, as well as any equity you have tied up in assets.

Assets are items of monetary value and are typically grouped into three categories: cash, cash equivalents, and property. When reporting assets on your mortgage application, it is important to provide accurate and up-to-date values and supporting documentation. Lenders may also need to verify the source of any large deposits to ensure they are from an allowable source and were not recently loaned to you.

Assets that you can include on your mortgage application are money in checking and savings accounts, investments such as stocks and bonds, properties, cars, valuable items, and business shares. These assets demonstrate your financial stability and ability to repay the loan. Liabilities that lenders will consider are your monthly debt payments and other financial obligations, such as ongoing childcare costs and monthly bills.

Lenders will also assess your income, credit history, and employment stability. They will verify your income by reviewing your tax returns, W-2s, and pay stubs, and they will check your credit score and history to assess your record of paying bills and other debts on time. Lenders may also take into account any bonuses, commission, or overtime when determining your overall income.

The size of your home loan affects how lenders assess your application

The size of your home loan does indeed affect how lenders assess your application. Lenders will assess your income to determine your ability to make repayments and calculate the size of a home loan payment you will likely be able to manage. They will also look at your employment history, savings and monthly debt payments, and other financial obligations to ensure you can comfortably take on a mortgage.

Lenders will also be interested in whether you are borrowing on your own or with someone else. If you are borrowing with a partner, their savings record and outstanding loans will also be reviewed. Lenders will also check your credit score and history to assess your record of paying bills and other debts on time. Your credit score can also dictate the interest rate you get on your loan and how much of a down payment will be required.

The bigger the loan, the more lenders will scrutinise your application. They will want to see a clear and consistent track record of savings being made over several months, and they will also look for other potential red flags in your finances, such as recurring payments to online gambling platforms. Lenders will also consider the value of the property and other possessions you're pledging as security against the loan. If you are borrowing a large sum, they will want to see that you have the financial discipline to manage your finances and have funds to pay the mortgage.

The purpose of your loan will also be assessed. If you are using the money to buy an asset, this is less risky than using it to pay off bills or debts. Borrowing to renovate your home is a choice, whereas repaying outstanding debts is a necessity.

Lenders will consider your employment history

If you have a short employment history, you may still be eligible for a home loan. Lenders will want to see a two-year work history, but this does not have to be with the same company. If you have changed jobs several times over the previous two years but have not had an employment gap of longer than a month, you will not be at a disadvantage. Lenders are more concerned with the stability of your income and your prospects for continued employment than with where you work or your job title. If you are self-employed, it is important to show that you have a steady income, and lenders may require documentation of your income, such as tax and financial statements.

If you have had employment gaps, be prepared to explain them with a letter of explanation. If you have had a drop in income, you can provide a letter explaining the decline and showing that your current income is stable. Career advancements or higher-paying roles can strengthen your application. If you have recently graduated, your time in school may be counted as part of your work history, but you must provide transcripts and proof of employment.

Frequently asked questions