Most people interested in purchasing real estate don’t have the cash to do so alone. Although there are several ways to acquire money, obtaining a mortgage is the most common. If approved, a loan covers the cost of the home. While a home loan makes it easier to secure a property, getting the green light isn’t as easy as it sounds. One of the most significant factors mortgage lenders consider is your credit.
Credit is a huge determining factor in getting approved for a mortgage. Lenders use this record of financial information to assess your creditworthiness. As supplying applicants with hundreds of thousands of dollars is risky, banks and private financial institutions want to keep them at a minimum. Here are a few of the factors they consider.
Character
Your credit score correlates with your character. Lenders prefer to approve applications of people with good financial practices and integrity. The information on your credit report gives them a clearer picture. They can tell how many accounts you have and, more importantly, how well you manage them. If your credit history is riddled with late payments, past due balances, and credit accounts, lenders are less likely to approve your application.
So, how do you show mortgage providers that you’re a person of good character and integrity? You maintain a credit score between 650-800 and keep your accounts in good standing. If your credit history is negative, paying down debts, disputing inaccuracies, and making timely payments over the next few months is advised. You can also look into solutions like a credit builder loan to help turn things around.
Financial Capacity
While you may be good at managing your existing credit accounts, lenders need to know that you also have the financial capacity to repay the mortgage. They will often ask to review your income taxes, pay stubs, and bank statements to assess your financial stability. The idea is to determine how much money you make and whether your income sources are stable enough to keep you afloat. If you’ve worked several jobs over the past few years or are classified as “low-income”, you may have a hard time getting approved.
Another factor lenders consider when it comes to your financial capacity is your debt to income ratio. This is the amount of debt you have in comparison to income. If your credit report shows that you have more debt than income, lenders will rate you high-risk. Ideally, lenders prefer to work with applicants that have a ratio of 30 percent or less. Essentially, this shows that you’ll be able to cover your mortgage payments, debts, and monthly expenses without an issue.
Capital and Collateral
Finally, mortgage companies use your credit report to assess capital and collateral. Capital is the amount of money you’ll have leftover after purchasing a home. As being a homeowner is a significant financial responsibility, lenders want to ensure that you have the means to handle it. If you don’t have any money in savings or buying the home will wipe out your financial cushion, lenders may be hesitant to give the green light.
Collateral are assets you have available to cover the mortgage cost if you default on the loan. While the property often serves as collateral, it’s not always enough to settle the debt in full. If the real estate market declines, it could lower the overall property value. As such, if a lender tries to sell the home to recoup some of the losses, they’ll get less than they invested. Borrowers with additional collateral sources are, therefore, ideal. Your credit report can give insight on other things you may have, like additional properties, vehicles, and businesses.
Unless you have a substantial amount of money tucked away in a savings account, you’ll need a mortgage to acquire a property. While there are several eligibility requirements to obtaining a home loan, the applicant’s credit history is significant. Having a clear understanding of what mortgage companies look for can help potential borrowers to improve their financial history to increase their chances of getting approved.
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