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Home Loan Review

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 homeís 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 specialistís 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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