Buying a house can be an exciting but stressful time, and one of the first steps is getting approved by a lender for a mortgage. To put yourself in the best position to be approved, there are a few things that you may have to improve on before making your application, whether that’s paying off your payday loan online direct lenders or making sure your credit report is up to scratch.
Read on to find out more about the 5 finance checks that lenders will carry out before deciding to approve your mortgage application.
What do mortgage lenders look for?
When applying for a mortgage, your lender must make sure that you are a trustworthy candidate when it comes to lending you funds.
They need to know that you are going to be able to pay back what you owe over the agreed timeframe and to do this, they need to carry out a few checks before approving your application.
Below, we’ll look at some of the factors that they will consider and how you can make sure your finances are in the best position for approval.
Recent applications
When you apply for a mortgage, your chosen lender will look at any other types of loan that you may have applied for recently. When you apply for a loan, it shows up on your credit report as a hard enquiry, and too many of these will show lenders that you are trying to be approved for funds and other loans.
This could result in your mortgage lender thinking that you are making risky decisions to get an extra bit of cash, which shows them that you may not be trustworthy, or you may be in financial difficulty and you’re looking for a way out.
Credit history
Your credit history plays an important role in being approved for a mortgage. When you take out a form of credit, whether that’s in the form of a credit card or a loan, this will show on your credit report. Your report will also show how trustworthy you are when it comes to repaying bills on time, and in full. If your credit history shows that you can make payments and pay off your outstanding debt, lenders may see you as a more trustworthy borrower than they would of someone that has regularly missed debt payments or has outstanding credit.
Debt-to-income ratio
Your DTI ratio is a great way for lenders to find out how healthy your finances are and how good you are at managing them. This shows how much of your income goes towards paying off your debt.
Generally, if your debt ratio is too high, and a lot of your income is going towards paying off outstanding debt, lenders are less likely to approve you for a mortgage as it shows them that you are not able to take on more debt.
It is best to keep your debt-to-income ratio low if you can, and if it is on the higher side, be prepared for high-interest rates, or you may even have your application declined.
Deposit
If you’re thinking about buying a house, you’re going to need a deposit to get you on the ladder and to make your application more attractive to mortgage lenders.
Generally, you should be saving for a 10-20% deposit on the home that you want – if you can show a mortgage lender that you have a deposit at the ready of this amount, you are more likely to be approved, and will benefit from loans with lower interest rates, as you are less of a risk. Save as much as you can so that you have a good lump sum to help you when being approved for a mortgage.
Affordability
Your mortgage lender is going to need to be sure that you can make the monthly payments towards your loan. To do this, they will base the decision of how much you can borrow from them on the total income that you receive monthly. If you have a partner, combine your two incomes, and see how much it comes to.
Generally, mortgage lenders will allow you to borrow 4 times your salary. Before you apply for your mortgage, make sure that your salary meets your expectations – if not, try and do what you can to increase your monthly income to put you in the best position.