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What Do Mortgage Lenders Really Want?

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If you are in the market for a mortgage, you might think that lenders use some arcane formula to make their decisions — one that your average consumer simply cannot understand. The criteria mortgage lenders use is actually much simpler and down to earth.

Understanding what mortgage lenders are really looking for is essential for all homebuyers. Banks and other mortgage lenders have tightened up their lending standards in recent years. They are taking a much harder look at their applicants’ finances and job prospects, and they are reviewing all submitted documents more carefully. That does not mean that you will not qualify for a mortgage, but it does mean you need to have all your ducks in a row before you start shopping for a new home.

Upgrade or First-time Buyer?

Whether you are a first-time buyer or in the market for an upgrade, you can be sure the lender will scrutinize your credit history carefully and take a close look at your credit score. While a credit score on the lower end of the spectrum does not necessarily doom your chances of getting a mortgage, that low score could mean a much higher interest rate.

Some lenders do set minimum credit scores for the mortgages they write, so it is a good idea to boost your credit score as much as possible before you start shopping. Paying down high credit card balances and avoiding taking on new debt are both smart moves if you are in the market for a home. Homebuyers with lower credit scores may also benefit from working with a mortgage broker. A good mortgage broker will know the policies of the lenders he or she works with and select the ones with the friendliest terms.

How’s Your Credit Score?

Even if you have a stellar credit score, the mortgage lender will want to make sure you can afford the monthly payments. The lender will carefully analyze your income, fixed expenses and discretionary income. The results of that analysis will tell the lender how easy (or difficult) it will be for you to afford the monthly payments.

This analysis will include not only the monthly mortgage payment but all housing-related expenses — things like property taxes, mortgage and homeowners insurance and any homeowners association fees. Your own analysis should include those same factors. You may find that shopping for a less expensive home makes sense, especially if the monthly payments would be a stretch financially.

Last but not least, the lender will want to make sure the value of the home justifies the size of the mortgage you plan to take out. Many banks and mortgage companies were caught off-guard when home values suddenly dropped during the Great Recession, and they are working hard to avoid making the same
mistake again.

Analyze and Approve

You can count on the lender to review and carefully analyze the appraisal for the property you have in mind. In some cases, the lender may require a second independent appraisal before approving the loan. No matter what type of home you are looking at or what size mortgage you need to make it happen, it is important to gather as much information as you can. Knowing what mortgage lenders are looking for can improve your chances of getting the loan you need and make the entire homebuying process a lot easier.

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