Buying a new home is an exciting milestone. While finding the right home is essential, the most important step toward homeownership is making sure you’re ready to apply for a home loan.
Applying for a mortgage is not something people do every day, so it’s natural to have questions. There are several factors that help determine a loan decision, along with strategies you can follow to help position yourself for the best loan at the best rates.
Angela Patterson, Vanderbilt Mortgage director of Credit and Credit Services, explains the three factors that have the biggest influence on any loan decision.
Your credit is a critical factor for lenders making a loan decision. They will learn more about your credit history and credit score by pulling a credit report.
A credit report shows how well an applicant has repaid any loan or credit obligation. Usually lenders look at the most recent pay history and look for debts with a high balance. While score is important and will most likely have an impact on the interest rate offered, the detailed pay history plays a significant role in whether an applicant is approved or declined.
Does this mean if you have a past blemish on your credit you will be denied a home loan? Not necessarily. There are many factors lenders consider.
“It is very important to our team to call every applicant,” says Patterson. “Our customers are more than just a credit score. We want to understand their journey and provide the financing program that best fits their situation.”
Income and debts
Determining your ability to repay the debt on time each month is important to a lender when making a loan decision. A debt-to-income ratio, or DTI, is one of the tools lenders use to determine your ability to pay. Two things need to be calculated to know this percent: monthly income and the existing credit obligations that are paid monthly.
Lenders typically use verified gross monthly income, your pay before taxes, when determining an ability to repay. Gross monthly income includes a paycheck from an employer, plus any money you may receive in government aid, child support or pensions.
After totaling gross income, the lender will need to determine the amount of debt the applicant pays toward each month. Typically, lenders use a credit report to identify the applicant’s debts. Some examples include car payments, student loans and credit card balances.
Employment is another important factor that goes into a loan decision. Lenders will look at the type and length of employment. If a person is self-employed, the applicant will need to prove steady income over a two-year period.
Consistent and non-temporary employment are seen favorably by most lenders. This means being regularly employed for two or more years. Consistent employment shows a lender stability in an applicant’s source of income, which is an indicator of their ability to repay the loan.
How does the lender learn about your employment history? Typically, they will request a Verification of Employment from your employer and will consider the information provided in the loan decision.
Understanding these three factors and knowing where your personal finances fit within them is important when applying for a home loan. While there are other things lenders consider, making sure you are financially fit in these three areas is a great start to getting ready to buy a home.