By Sabrina Karl
When applying for a mortgage, lenders ask for so much information and documentation that it can be hard to understand exactly their magnifying glass is trained on. But what they specifically want to see can be boiled down to four factors: your credit history, your debts, your income and employment, and your funds available for a down payment and reserves.
Your credit score is among the first things they will assess, both to make sure you meet a minimum threshold (generally at least 620) and, for scores above that, the interest rate they’ll be willing to offer. The higher your credit score, the better the rate you can secure.
Also under close scrutiny and calculation will be how much debt you hold relative to your income. Mortgage lenders need to see that the sum of your monthly debt obligations, plus your proposed mortgage payment, will not exceed 43 percent of your monthly pre-tax income. And they’d prefer to see a debt-to-income ratio of 36 percent or lower.
To determine this ratio, knowing your income is also critical. That’s why lenders want to see two years’ worth of income and employment history. But they’re also assessing whether your income appears reliable, or if there’s reason to worry that what you’re bringing home now is not likely to be indicative of your income in the future.
Lastly, a lender will pay close attention to how much money you’ll have available for a down payment, how long you’ve had it, and how much reserve you’ll have afterwards. Proof that you’ve had the funds for at least two months is important, as they won’t count money that shows up just before closing. They’ll also want you to have some cash leftover for moving and home expenses, as well as potential surprises.