What do Lenders Look for when Reviewing a Home Loan Application
Home finance shopping seems to be a mysterious task. All the
promotions, gimmicks, buzz words and confusing options can lead a
person to wonder how in the world they will even buy a home. Much
time is spent reading advertisements and brochures, wading through
new concepts such as debt to equity ratio and sometimes a person
feels they need to go back to school just to obtain a home loan. In
reality, a home loan is just a loan secured by real estate.
Probably the most frightening part of the process is not knowing
what the home finance lender requires and what information you are
required to submit or produce for consideration. So, we have tried
to take the mystery and fear out of the process of applying for a
household finance loan by reviewing the main points that will be
reviewed when you finally submit your application.
1. Down Payment
The home loan specialist will need to know how much of a down
payment you are prepared to deposit on the home and from where the
down payment will come. The bigger the amount of the down payment
and the less you are required to home finance generally works in
your favor. You are able to receive better interest rates and
normally have less of a difficult time being approved for the home
loan.
Also, and this is somewhat obvious, the bigger the down payment, the
less amount of time it will take to pay off the home finance.
Although, household finance institutes want to make money from the
interest on the home loan, at the same time, they like loans that
have the least amount of risk possible.
You may use funds from family and relatives and in many cases people
have parents who will assist them financially with the deposit on a
home loan. When it comes time to obtain the home loan, however, the
funds will need to be in your own bank account. You will need to
show a statement of your account proving that you in fact have the
agreed upon down payment. The same is true if you have the cash
available in a savings account. The home finance lender will need to
see the actual funds on paper.
If your down payment is derived from other investments that will be
maturing, you will need to show proof that the investment is
liquidable and either is or will be available for use as cash. In
some instances, if you have monies on the way from a bonus or sale
of some other asset, if you can prove the money will be there, you
may use that as part of your down payment as well.
2. Ability to Repay the Home Loan
Probably one of the most obvious things a home loan lender will want
to know is whether you can comfortably and realistically make
monthly payments on the home finance. The home finance lender will
want to see proof of a stable and consistent earning power.
Different home loan lenders have different rules but they would be
looking to see if you have had gainful employment over the last
couple of years. For some home finance institutes, if you have a
spotted job history record going from job to job and the periods
between are lengthy, the home loan lender will see this a risk to
their funds and will most likely deny the home loan application.
There is nothing wrong with changing jobs as long as you can show
that there were little or no intervals in between.
For people who do not have consistent earnings because they are
self-employed or work on commission, the home loan lender may ask to
see income tax filings to determine their legitimate or reported
earnings.
3. Debt to Equity Ratio
Without getting into all the technical sides of how the bank
calculates this ratio, the bottom line is you need available cash
each month to make your home finance payments. You must have more
cash coming in than going out. Whether you believe you are capable
or not are irrelevant. The bank will determine whether you already
carry too much debt or whether you will be able to safely repay the
home loan.
The financing bank will take into account your earnings that are
defined by your solid, stable earnings. Basically, your regular
paycheck. The bank will not include bonuses, overtime and any other
special employee compensation plans. Then, the bank will look at
your outgoing costs. All of your monthly, quarterly and yearly
expenses. These expenses may include: credit card payments, car
payments, auto insurance, other mortgage payments, utility bills,
personal loans and basically anything that requires a regular
payment.
Lastly, the bank will calculate the exact percentage or rate of your
debt to equity and decide whether it fits within their dictated
parameters for approving a home loan application.
4. Credit Rating or Credit Score
The home finance lender will most probably pull a credit report in
the beginning stages of the home loan application. In fact, most
banks will have a copy of your report in your file when you go for
your appointment. Basically, they will want to see up front if you
are generally a good candidate to consider for a home loan.
5. Marketability of Property
One of the important factors to remember when seeking a home loan is
even though you have the ability to pay, you have a substantial down
payment and you are credit worthy, it does not mean you always be
approved for a home loan.
Imagine you find a home that is run down and you will need to do
many repairs to bring it to code or even to live in it comfortably.
In this scenario, you will most likely need more money after you
purchase the home to complete all your repairs. To the home finance
lender, the building may not be worth restoring and may be
considered a risky venture. At this point the home loan lender will
decline the application of the potential borrower.
In addition, the home loan lender will want to know that in a worse
case scenario, if the borrower did default on the home finance, and
the lender was required to foreclose or repossess the property, the
property and building could be sold for fair market value. The home
loan lenders always look out for their interests and they must
protect their investment.
6. Home Inspection
Most home finance lenders require a home inspection to determine the
worthiness or soundness of a home. The inspector will determine
whether the home is insurable, whether the plumbing and electrical
meet code, whether the structure is sound, is the roof properly
covered as well as many other safety factors. Again, just because
someone wants to buy a house does not mean that the home loan lender
will finance the home. Depending on the extent of the potential
safety hazards, a potential borrower may not have the available cash
to bring the home up to standard. Most likely, their home loan
application will be denied.
7. Home Appraisal
An appraiser will be sent out to determine the value of the home.
The home’s value will need to reflect other homes in the
neighborhood. If a borrower has requested an amount substantially
different than the real value, the household finance lender will
want to know why. Also, if the borrower has agreed to pay a
considerably higher price for the home than the value of the other
homes, the lender may not approve the home loan.
As a final word, when looking for a home loan, try to prepare your
ideas and thoughts before going to the appointment. Know where you
will get your down payment and roughly how much you are prepared to
use. Have all your documentation ready for the home finance
specialist’s perusal. Be honest in your declarations, as the
household finance expert will ultimately find out if you are
embellishing your circumstances to your benefit.
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First Time Buyers ??? |
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| How Much Can You Afford? |
| The Anatomy of a Mortgage |
| The Two Basic Types of Mortgages |
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| The Lender: Bank or Mortgage Broker? |
| Loans for Sale |
| Shopping for a Loan |
| Finding your loan online |
| Consider a Mortgage Pre-Approval |
| Six Strategies for Saving Money on Your Mortgage |
| The Down Payment |
| Special Loans for Everyone |
| The Tax Implications of Buying Your Home |
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