- Evaluation of your credit score is necessary for approval of a mortgage. The information on your credit score outlines your on-time payment history for any debts and bills. Ideally, you should review your credit score prior to applying for a mortgage to verify that the information is correct and appeal issues if necessary or take care of any derogatory items. A credit score of 720 or higher will enable a buyer to receive the best interest rates, 719 to 675 will receive a moderate rate and below 620 will receive a subprime rate.
- Lenders want to know your ability to repay the loan and evaluate your current and future ability to make payments. Generally, you need a debt-to-income ratio of no more than 36 percent of your gross monthly income; this means that you spend 36 percent or less of your gross monthly paycheck on current monthly debt payments. This evaluation involves your current income, employment history, savings and debts. Documents that should be provided for the mortgage company's review include recent pay stubs, W-2 forms for the past two years or tax returns if self-employed, long-term debt notes (car loans, student loans, etc.), proof of supplemental income, and child support or alimony records.
- Mortgage companies are also interested in any capital or reserves of money a borrower has. Capital includes cash, savings, investments, property and other assets that can be easily liquidated. Documents that provide proof of capital include recent bank statements, investment documents, proof of supplemental income, and proof of assets, including real estate and other appreciating items.
- To reduce risk, the lender will do a home appraisal to verify that the amount of the loan is equal to or less than the value of the home; this allows the lender to recoup the loan in the event of a foreclosure. In a case where an appraisal is lower than the selling price, the difference can be made up by negotiating a lower sale price or including the difference in the down payment.
- Although a down payment is not required for every mortgage, saving for a down payment is beneficial for securing a loan. A down payment contributes to your capital and can be used as collateral if you are applying for a no-down payment mortgage. In any case, when deciding to purchase a home, it is advantageous to save for the unknown.
