What Mortgage Lenders Look For in a Buyer
Boise Mortgage Companies provide home loans to help buyers buy a property. They may be banks, credit unions, or online lenders.
When choosing a lender, compare loan programs and terms like mortgage rates, interest rate APRs, upfront fees and closing costs. Also, consider how a lender treats credit-challenged borrowers. This can make a big difference in your mortgage experience.
Credit Score
If you’re shopping for a mortgage, it’s important to know that the credit score mortgage lenders use may be different from the scores you see in your personal finance apps or on your credit card statements. The reason for this is that mortgage lenders will typically pull a “tri-merge” report, which consists of credit reports from all three major bureaus – Experian, Equifax and TransUnion. These credit reports are then used to generate a “Qualifying Credit Score” for mortgage applicants.
What’s more, the credit scoring model used by your lender can also vary. While all of the credit scores produced by the bureaus come from the same company (FICO), different scoring models weigh factors differently. For example, the FICO 8 model is known for being more critical of high balances on revolving accounts. While this is a good thing for consumers, it can hurt mortgage borrowers whose credit utilization ratio is too high.
The scoring model used by your mortgage lender will be one of the most important factors in determining whether you’re approved for a loan and what kind of terms you can get. While it’s important to have a good credit score, you can still qualify for a mortgage even if your score isn’t great – just be prepared to put more money down or pay higher interest rates.
To determine your qualifying credit score, most mortgage lenders will take the middle score of the tri-merge report. The mortgage lender will then use that score throughout the mortgage process. This process differs from conventional mortgages backed by Fannie Mae, which use the median score of all borrowers on the loan application.
While you can request a copy of your credit report from each of the three major credit reporting agencies for free (due to the COVID-19 pandemic, you can only receive a report from one of the bureaus per year), most mortgage lenders will use the tri-merge report to determine your qualifying score. If you’re applying for a mortgage jointly with someone else, the mortgage lender will average the median score of all borrowers.
Down Payment
A down payment is an upfront portion of the home purchase price paid by the buyer with cash. The rest of the cost is covered by a mortgage loan, which is paid back monthly along with interest. A down payment is usually required by most lenders, and the size of it influences the terms of the mortgage.
A large down payment may reduce the number of months required to pay off the debt and it can lower the interest rate you pay. For this reason, many homebuyers spend time saving for a down payment. They create a budget, scrimp where they can and try to put any extra money (like birthday card cash or work bonuses) toward the down payment.
The size of your down payment may also be influenced by whether this will be your primary residence, vacation or investment property. There is more risk involved when borrowers buy homes as investments, so there may be higher down payment requirements or more stringent credit score requirements.
When you apply for a mortgage, your lender will ask for information about your savings and checking accounts, as well as outstanding debt obligations like credit cards, car loans and student loan balances. Lenders also review your past 3+ months of bank activity and will look for large deposits that may indicate a new source of funds. If you receive a gift from a family member or friend to use towards a down payment, you will likely need to provide a letter that clarifies the relationship, documents the amount and confirms contact information.
If you’re concerned about the amount of money you can save for a down payment, consider using a mortgage calculator to see what your potential monthly payments would be with various down payment scenarios. Our Loan Advisors are happy to sit down with you and run different numbers based on your specific parameters.
Income
There is no minimum dollar amount that you must earn to qualify for a mortgage, but lenders want to be sure that you have enough income coming in to cover your loan payments as well as your other bills. They do this by looking at your household income, which typically includes wages from a job, but also may include other sources of income such as retirement and investment accounts. They also look at your debt-to-income ratio, which is how much of your income goes to paying off your credit cards, car loans, other debts and housing expenses.
The mortgage lender’s requirements can vary slightly from one bank to another, but they all base their decisions on the same factors. While they consider your income and other debts, they also set the terms of the mortgage and interest rate. You can shop around for a mortgage, and you will find that some lenders offer more flexible terms than others.
Different types of mortgage lenders include retail lenders, portfolio lenders, wholesale lenders and mortgage brokers. Retail lenders provide mortgages directly to consumers. Portfolio lenders use their own funds to fund mortgages rather than sourcing them from other lenders. Wholesale lenders are banks and other financial institutions that don’t work directly with consumers, but instead originate, fund and sometimes service mortgage loans. Mortgage brokers are individuals who negotiate, place or assist in the placement of mortgage loans on residential property for compensation or gain. They must be licensed in the state where they operate.
No-income verification mortgages (also called no documentation or non-QM loans) are still available for some borrowers, but they are very restrictive and require a high credit score and significant down payment. These loans are usually reserved for self-employed borrowers and those who have a high net worth. They are also more expensive than traditional mortgages, since the lender takes on more risk by lending to low-income borrowers. They can be a great option for those who need a mortgage but have issues with their credit or savings. They can also be useful for investors who want to buy a property and rent it out, but don’t have the income to qualify for a conventional mortgage.
Assets
Lenders review your liquid assets – cash, money market accounts and certificates of deposit (CDs) – to determine how much of a financial cushion you have to make mortgage payments if your job was lost or income were reduced. The more assets you have, the less likely you are to default on your loan in a time of crisis.
For traditional conforming loans backed by Fannie Mae or Freddie Mac, you are typically required to have a certain number of months in mortgage reserves. These are funds you can use to cover your monthly housing costs including PITI, property taxes and homeowners insurance. Mortgage reserve requirements vary based on your lender and the type of loan.
Some lenders require more mortgage reserves than others for jumbo loans and other types of non-conforming mortgage programs. Lenders review your assets and use a formula to calculate how much of a cushion you have to meet mortgage reserve requirements.
The key is that the assets you have are sourced and seasoned, and that your savings pattern is stable. For example, if you make a large deposit into your account shortly before applying for a mortgage, your lender will be suspicious and may ask you to explain where the funds came from. This might prompt a delay in the process or even rejection of your application, depending on the lender.
Liquid assets typically include cash in checking and savings accounts, money market accounts and CDs. For other types of assets, such as retirement accounts and real estate holdings, you’ll be asked to provide verification documents, which normally include account statements and deeds for ownership. For private equity stakes in companies, documentation will vary and might include business operating agreements, shareholder certificates or corporate charters.
You’re also expected to disclose the value of your personal property, such as cars and furniture. You may need to provide a valuation report from an independent appraiser for the property and supporting ownership documents. Similarly, for some types of investment properties you’ll need to submit appraisal reports and property management agreements.
