Mortgage Q&A: “What do mortgage lenders look for?”
Most banks and mortgage lenders are looking for the same basic thing when they review your financials; 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.
Here are some useful tips to help you boost your odds of mortgage approval.
Pinpoint Potential Red Flags Before the Mortgage Lender Does
- A home loan application is kind of like a job interview
- You only get one chance to make a good first impression
- Make sure you take a hard look at all your financials before the lender does
- This will allow you to resolve anything beforehand and avoid any major missteps
Think of a home loan application like a job interview. You want to put your best foot forward.
You also only get one chance to make a first impression, so make it a good one if you want things to go smoothly.
This means taking a hard look at yourself and determining what your weaknesses and strengths are as a mortgage borrower. This is exactly what a lender will do.
Before your loan application is submitted to a bank/lender, it is imperative 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 scores.
Ultimately, you want your loan application to be as strong as possible and to make sense so approval will be the only option; mortgage underwriters tend to love common sense.
As long as everything adds up, they can approve it knowing they won’t get any flak for letting a bad loan slip through the cracks.
Mortgage Lenders Will Look at Your Credit Report, Bank Statements, Tax Returns, and Your Job History
- 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 other assets
- An appraiser/underwriter will review the value of the subject property as well
One of the biggest things lenders are concerned about is credit. It can be a big driver of default, so they want to make sure you’re a good borrower with a history of on-time payments.
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 a home or refinance your mortgage.
I’ve written extensively about credit’s role in the loan approval process, so you can learn more by clicking the preceding link.
Do yourself a favor and review your credit report before a lender does to see where you stand and address any issues.
What do mortgage companies look for on bank statements?
- They’ll look at your account balance over time (usually 60 days) to determine your liquid reserves
- And flag any unusual deposits or withdrawals during that time, such as large incoming transfers
- They basically want to see a healthy pattern of saving money
- And numbers that make sense based on what you say you do for a living
If you don’t have money for a down payment or seasoned asset reserves, your home loan application may be declined or scrutinized further.
Typically, you’ll be asked to provide your two most recent bank statements (checking or savings accounts) that cover the past 60 days.
Lenders ask for your banks statements to ensure the money you claim to have is actually yours and not borrowed or acquired fraudulently.
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 bank statements.
To avoid unnecessary problems or additional questions, you can transfer money into the account you plan to use 60+ days in advance. Then barely touch that account in the meantime.
That way the funds will be seasoned and there won’t be any question about how the money got there.
This won’t be the case if you kept the money under your mattress and transferred it at the last minute.
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?
- The lender may speak with your employer as part of the verification process
- They will ask when you started the job you currently hold (date hired)
- What your current position is (to ensure you’re still employed!)
- And the probability of your continued employment going forward
The same basic approach is used for employment; they want to see a pattern of stability.
For example, 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 over time, 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 ask the employer 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 actually do what you say you do.
What do mortgage companies look for on tax returns?
- They use tax returns to verify your income (and also pay stubs to review recent wages)
- Typically require two years of returns (though sometimes one year will suffice)
- They will double-check the numbers and may also take note of rising or falling income if applicable
- If there are any questions or a need for clarification they may ask for a letter of explanation
These days, mortgage lenders need to verify your income, so the best way to do that is to look at your actual taxes from the IRS. And often they don’t just want one year of 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 falling, you might have to explain yourself via a letter of explanation.
The underwriter ultimately needs to determine that your income is stable, predictable, and likely to continue.
They may 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 attempt to 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.”
Some Things May Be Out of Your Hands
- You can’t always control everything and surprises can still happen
- Unforeseen issues related to the property itself might be unavoidable (like a low appraisal or inspection problem)
- But preparation is key to address the avoidable problems that may arise later
- Have a backup plan in place so you don’t lose your dream home due to a lack of financing
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.
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 in a cheaper part of town because you’ll be closer to family.
Scrutinize your own story with a family member first to figure out what an underwriter might ask once you apply.
Work with a Knowledgeable Partner to Avoid Mistakes
This way, many mortgage mistakes can be avoided in the first place, which could save you time and money.
A broker 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.