Mortgage Q&A: “What do mortgage lenders look for?”
While this is a bit of a broad question, most banks and mortgage lenders are looking for the same basic thing, your ability to repay the home loan.
After all, as long as you make your mortgage payments on time each month, there isn’t much else for them to worry about. You hold up your end of the bargain and they’ll be more than happy to extend financing.
Keep in mind that this differs from the priorities of some loan originators, who are more concerned with your ability to qualify for a loan (so they can get paid a commission), as opposed to actually being able to afford it.
Lenders want to make money as well, but not by writing bad loans. And they certainly don’t want to let any fraudulent activity make its way through their doors.
Pinpoint Potential Red Flags Before the Lender Does
- A home loan application is like a job interview
- You only get one chance to make a good impression
- Make sure you take a hard look at all your financials
- Before the lender does to avoid any missteps
Think of a home loan application like a job interview. You want to put your best foot forward. This means taking a hard look at yourself and determining what your weaknesses and strengths are. This is exactly what a lender will do.
So before your loan application is actually submitted to a bank or mortgage lender, it is imperative to ensure that every possible red flag has been addressed.
Typically, borrowers know what these issues are, but if you don’t, consider shortcomings in asset, income, employment and/or credit departments.
Ultimately, you want your loan application to be as strong as possible and to make sense so approval will be the only option; underwriters tend to love common sense. As long as it makes sense, they can approve it knowing they won’t get any flak for letting a bad loan slip through the cracks.
They’ll Look at Your Credit, Your Assets, and Your Job
- Lenders will review your credit report and credit scores
- They’ll assess your employment history and income
- They’ll ask for bank statements and review your assets
- An appraiser/underwriter will review the subject property
One of the biggest things lenders are concerned about is credit. If you don’t check your credit score before applying for a mortgage, the deal could be DOA, so it’s key to know where you stand before looking to purchase or refinance.
I’ve written extensively about credit’s role in the loan approval process, so you can learn more by clicking the preceding link.
What do mortgage companies look for on bank statements?
- They’ll look at your account balance over time
- And flag any unusual deposits or withdrawals
- They basically want to see a pattern of saving
- And numbers that make sense based on what you say you do/earn
If you don’t have money for a down payment or seasoned asset reserves, your application may be declined or scrutinized further; so take care of your banking details at least a couple of months before applying.
This means having the money in verifiable accounts you plan to share with the underwriter, not under your mattress.
Lenders ask for banks statements to ensure the money you claim to have is actually in the accounts. They’ll also want to know it’s been there for a couple months, not just deposited right before applying for a loan (aka not your actual money).
That’s why they ask for the past two months of statements. Also note that they’ll scrutinize any large or unusual deposits that show up in your statements, so try to keep things simple before and during your mortgage application process.
What do mortgage companies ask your employer?
- If they speak with your employer
- They will ask when you started the job
- How long you’ve been working there
- And what your current position is (to ensure you’re still employed!)
Same goes for income; if you haven’t had steady work for two years, the underwriter will have a much better (and easier) reason to deny your application. But if you’ve been with the same company for years and your income has steadily increased, you should be in good shape.
Similar to your income and assets, lenders will want to verify your employment prior to funding your loan, either with a written Verification of Employment (VOE) and/or a verbal phone call to your employer. The lender will want the employer to verify when you started working there, what your current position/title is, and if you’re still currently employed.
If you’re self-employed, they’ll ask for a CPA letter to verify you do what you say you do.
What do mortgage companies look for on tax returns?
- They need to verify your income
- Typically over a 2-year period (though sometimes one year will suffice)
- They may also note rising or falling income
- And ask for an explanation if applicable
Clearly they want to verify your income, so the best way to do that is to look at your actual taxes. And they don’t just want one year or tax returns, they want the last two. With two years of returns, they can see if your income is steady, dropping, or rising. If it’s dropping, you might have to explain yourself.
They will also ask you to fill out a form 4506-T, which is a request for tax return transcripts. This is done to make sure everything matches up and to prevent fraud. So don’t submit bogus tax returns.
If you’re self-employed, make sure your business that’s making all that money is well organized, at least on paper. That means having something as simple as a business phone number, assuming you’re bringing in tens of thousands a month; disorganization can cost you there.
Underwriters simply won’t believe you’re making $20,000 a month if your business phone number is your personal line with a voicemail recording that says, “What up dude.”
If you claim a ton of business expenses, be careful that they don’t reduce your taxable income to the point where you no longer qualify.
If occupancy is a concern, make sure you have the documentation to back it up; if you’re downgrading to a smaller home, you better have a great narrative in place.
For example, buying a single-story home after owning a two-story home because you have trouble getting up and down the stairs. Or moving to a similar, yet inferior home because you’ll be closer to family.
Some Things May Be Out of Your Hands
- You can’t always control everything
- Like issues that come up with the property itself
- But preparation is key to address avoidable problems
- Have a backup plan in place so you don’t lose your dream home
Unfortunately, some things may be out of your control, like issues tied to the property itself. Perhaps some aspects of the home aren’t up to code, or the value just isn’t there (appraised value); if that’s the case, you may be out of luck regardless of how well prepared you are.
One advantage to working with a loan officer/mortgage broker is that they can prepare your loan file before it ever gets to the mortgage company, so many mortgage mistakes can be avoided. They can also shop your loan with multiple banks and lenders, so if it doesn’t fly with one, it can be resubmitted to another.
Keep in mind that even the smallest detail could cost you the deal altogether, so it never hurts to go over the loan file with a fine-tooth comb (with the help of a loan processor) to ensure everything is ship shape.
There’s never any guarantee, but the more preparation you put into it, the better off you’ll be.