Qualifying for a mortgage is an initial step toward homeownership. However, it isn’t a guaranteed journey, so you’d want to put your best foot forward when securing a mortgage.
However, that can be challenging to achieve when you’re uncertain about what your lender is looking for.
The mortgage application process can be complex. But it’s much less daunting when you know what mortgage lenders consider when approving your loan application.
The credit score is the first thing lenders assess, reflecting your repayment history, total debt levels, and number of accounts.
Still, other factors in your financial history influence your ability to get mortgage approval, including:
The Amount Of The Loan You Want To Borrow
The amount of the mortgage loan impacts how lenders evaluate your application.
It should not exceed the loan’s maximum loan-to-value ratio (LVR). It’s the ratio of the loan amount to the value of the asset you’re purchasing.
Lenders use LVR to assess the risk factor of your loan. Most lenders view an LVR exceeding 80 percent negatively.
On the other hand, an LVR of 80 percent or lower is often considered appealing. It also means a smaller loan for you to pay back.
Some home loan programs allow for a relatively high maximum LVR. However, they’re specifically designed for first-time home buyers and those with a low-to-moderate income.
If you want to boost your chances of approval, keep your proposed borrowing amount under your set LVR.
It’s worth noting that having an LVR that exceeds 80 percent doesn’t automatically disqualify you from borrowing.
Some lenders will accommodate those with an LVR of around 95 percent. But this will pose more risk to the lender, making them more likely to scrutinize your application.
How Much You Can Put Toward Your Down Payment
Should you fail to repay the mortgage loan, lenders would want to recover all the funds they loaned you.
Hence, the more money you pay upfront or put toward a down payment, the less risky you appear to lenders.
It also demonstrates to lenders that you have the financial capacity required for mortgage loans.
You have a higher chance of getting approved for a mortgage loan if you make more substantial down payments.
Likewise, it can help you secure more favorable terms on your mortgage. It’s crucial to note that the size of your down payment also determines how much you’ll need to borrow.
The Ratio Of Your Existing Debts And Overall Income
Before approving your mortgage application, lenders will assess your debt-to-income (DTI) ratio. In essence, your DTI ratio is the portion of your gross monthly income allocated to paying your existing debts.
It may include various types of debt, such as credit card balances, mortgage payments, rents, and other loans.
Your DTI ratio gives lenders an insight into how you’ll manage your monthly mortgage payments while repaying your current debt obligations.
Since a low DTI ratio indicates a good balance between your outstanding debts and income, it can improve your chance of getting mortgage approval.
Most lenders favor a DTI ratio lower than 36 percent, but no more than 28 percent of the debts must go toward paying a mortgage or rent.
In contrast, a high DTI ratio can demonstrate that you have too much debt for the monthly income you earn.
The general rule of thumb is that you can still qualify for a mortgage with a DTI ratio of up to 43 percent.
Your Income Source And Employment Record
Lenders want to know your income source and employment record before approving your loan.
Your income reflects how much you’re earning, while your employment record shows whether you have a consistent source of income.
Generally, lenders favor borrowers with stable employment histories. It’s a significant metric for determining your eligibility for approval.
You might be an ideal candidate for a mortgage if you have held the same job for several years and have a stable income.
Suppose you are self-employed. Lenders may require you to provide at least two years of tax documents to calculate your average income over that time.
The Type And Location Of The Property
The type and location of the property are also factors lenders consider when evaluating your mortgage application. Note that the property you plan to buy is your mortgage loan’s security.
Hence, it makes sense that lenders will also assess the property’s quality. Specifically, they will examine whether it’s in a favorable location and will likely increase in value over time. Remember that lenders won’t waste time approving properties that fail to meet their requirements.
Increase Your Chances Of Mortgage Approval
Understanding the factors influencing the outcome of your mortgage application can help increase your chances of getting approved.
Likewise, you must know how the mortgage process works, especially if you’re a first-time homebuyer.
Remember that different lenders have various rules for determining who is eligible for mortgage financing.
It can be helpful to seek valuable advice from professionals in the mortgage industry, such as financial advisors and mortgage brokers.