Sometimes it seems that a mortgage approval is based on a complicated and mysterious formula. But this is not so. Mortgage approvals are based on four areas of financial wellness. Once you know what lenders value, you can take steps to make sure your application will be accepted.
Financial Wellness Area 1: Income
The best way to impress a mortgage lender is by having a conventional, steady income. Mortgage lenders want to see that you have worked for the same employer for a significant number of years. While it is true that this sluggish economy has sent more and more people into freelancing and self-employment, it is hard to impress a mortgage lender with your creativity.
Mortgage lenders love W-2s, and they love to see that you have spent years with the same company. Bouncing from employer to employer is not helpful when you are trying to get a mortgage. If your employment history could use a little stability, work on excelling at your job, and wait a few years before applying for a mortgage.
Financial Wellness Area 2: Payment History
Since a mortgage is a loan that must be paid back with interest, one of the most important things lenders look for is a healthy payment history. If you pay your bills on time without fail, this is one area in which you will shine. In fact, a great payment history can sway a mortgage lender in your favor even if you have some negative factors in your profile.
Your credit score is one way mortgage lenders can tell if you regularly pay your bills. A good risk has a credit score that is over 700. The Federal Housing Authority (FHA) has loan programs that may be able to help those with scores between 620 and 700.
Financial Wellness Area 3: Credit History
Your credit history shows lenders that you have a proven track record of receiving and paying off loans. Sometimes credit history is one area that hurts younger borrowers since they haven’t had time to establish a long history.
The good news is that it is easy to create a great credit history. Go ahead and open a credit card account with a major company, such as MasterCard or Visa. Department store accounts reflect negatively on your credit score, so avoid these cards. Next, use your credit card for manageable purchases just as you would use a debit card. For example, if you purchase a tank of gas for $40 with your new credit card, go home and use your online banking service to pay the credit card company $40 that same day.
If you use this system, you will never incur any finance charges, and you will improve your credit history. Naturally, you can also pay off your card at the end of each month with the same result, but this approach takes a little more planning and commitment.
Financial Wellness Area 4: Responsible Use of Credit
Lenders look for borrowers who use credit responsibly. To mortgage lenders, a borrower who uses credit responsibly is a borrower who uses a variety of credit types. In other words, lenders look for borrowers who have used a personal line of credit, such as a bank loan, and an installment loan, such as a car loan, in addition to credit cards.
One red flag that hurts your chances to qualify for a mortgage is having a credit card that is almost maxed out. To avoid this negative perception, pay off your card each month. If paying off the card is impossible, then spread the debt around so that several cards carry the debt rather than one maxed-out card. Oddly enough, this strategy is preferable to having one card that is nearing its limit.
The four areas of financial wellness are reasonable and easy to improve with a little time. Understanding what mortgage lenders are looking for helps borrowers arrange their lives so that they are viewed as good risks, people who can be counted on to pay back the mortgage on time and in full each month.