The prospect of buying your first home is very exciting. Before you start shopping, it is important to ensure you know what your mortgage application involves. Keep reading to learn more about what banks look at when considering a mortgage.
Here are a few things banks look at when evaluating you for a mortgage:
- Credit history
- Employment
- Income
- Assets (savings, investments)
- Debts (student loans, auto loans, credit cards)
Credit history
Your credit history is a record of your financial reliability to pay your debts. It is used as a deciding factor to determine your ability to repay loans and is based on:
- your payment history
- the number of accounts you have open
- the types of accounts you hold
The credit score lenders use comes from information in your credit report, including items known as “trade lines” including:
- Account balances (including outstanding debt)
- Payment history (whether you’ve paid bills on time)
- Credit utilization ratio (how much available credit you’re using)
Employment
When banks considers your employment, they look at how long you have worked for the same company/industry. This allows them to determine your job stability.
The mortgage provider will ask you for:
- a letter of employment showing your current salary and any upcoming raises
- a letter from your employer confirming that you’re employed by them
- If you are self-employed: tax statements for the past two years.
Proof of stable employment gives banks the confidence to provide a mortgage approval.
Income
The most important factor banks consider for a mortgage approval is your income. In fact, mortgage providers want to see that you earn at least three times the annual mortgage payment. They also want to ensure your income is stable and verifiable. Mortgage providers consider how long you have been working in your field for. Additionally, they like to see that you have been with the same employer.
Assets (savings, investments)
Banks wants to see that you have enough assets to cover the down payment and closing costs, as well as any other expenses associated with buying your home.
Additionally, lenders will also want to know what kind of investments and savings accounts you have. In general, having a decent amount of cash in the bank gives lenders confidence that you’ll be able make timely payments on your loan.
Debts (student loans, auto loans, credit cards)
In order to decided if you will be approved for a mortgage, banks will consDebts include credit card debt, auto loans and student loans—and yes, your mortgage. The bank wants to know how you’re managing your debt. A history of late payments or bankruptcy will likely make the bank hesitant to give you a loan.
Your credit history is important. A strong credit history shows that you’ve been responsible with paying off bills in the past. This can help make up for a possible weaknesses in your application (like not having strong assets).
While these factors are important, it’s not one-size-fits-all.
Now that you know what banks look at when considering a mortgage, you may have other things that are important to you, like the length of your mortgage. If you want to pay off your home loan in five years instead of 25 years, that’s something lenders should look at when evaluating your application. To get a better understanding of what type of mortgage is best for you, we suggest contacting a mortgage broker.
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