How do lenders check if I can afford a mortgage loan?

The first thing a lender will do when you apply for a mortgage loan is check your debt-to-income (DTI) ratio. This number essentially tells a lender how much of your income is allocated to existing monthly payments and the mortgage loan amount and mortgage loan rates for which you are eligible. To find this percentage, you simply take the total of your monthly bills and divide them by your gross monthly income (income before taxes). This equation will result in your DTI ratio. Your monthly bills would include debts like a current mortgage, car payments, the minimum amount due monthly for credit card debt, student loan payments and any other monthly debts. A mortgage loan lender is looking for a DTI that is 43% or less, in fact the lower the DTI, the lower the risk for the lender. If you have exceptional credit or a large amount of cash assets, you could get approved with a DTI of 50% but those are not common scenarios.

How to prepare for your application

Once you understand what a lender is looking for when you apply for a mortgage loan, it is relatively simple to prepare for the application.

  • Raise your credit score. Check your credit before a lender does and, if possible, amend any disputes you may find on your existing report and pay down any debt that you can afford.
  • Avoid big purchases. Make sure you do not incur additional debt until your mortgage is finalized. In order to receive the best mortgage loan rates and to make sure your mortgage does not fall through, avoid any large purchases until your lender has written you a check. This includes anything you were going to put on credit for your new home and especially includes buying a vehicle.
  • Avoid changes in employment. If possible, avoid changing jobs, terminating employment or switching to self-employment while you are in the mortgage loan application process.
  • Be prepared to explain your bank statements. If you have any large deposits or withdrawals that are out of the ordinary (i.e. not paychecks), be ready to discuss them with your lending agency.
  • Make sure you can actually afford a mortgage loan. Doing the research and understanding mortgage loan rates is essential preparation. If you only qualify for a variable-rate mortgage and that is going to stretch your budget tight, it may be best to hold off, and wait until you qualify for a better mortgage loan rate so you don’t run the risk of defaulting.

What you need to apply for a mortgage

When you apply for loans & mortgages, you will need to have:

  • 1 month of your paystubs
  • 2 most recent years’ tax filings
  • 3 months of bank statements

Speak to a mortgage adviser

Applying for a mortgage loan involves a lot of paperwork and can take a significant amount of time. It is always best to speak with a mortgage adviser as soon as you are entertaining the idea of buying a house and applying for a mortgage loan. Not only does speaking with an adviser give you a better idea of what the mortgage loan process looks like, but they can help you understand the difference between bank mortgage loan rates and credit union mortgage loan rates. Getting pre-approved for a mortgage loan by working with an adviser can also help speed up your home buying process. There is nothing stopping you from getting a better mortgage loan rate if you find one you qualify for, but once you are pre-approved, searching for a home becomes a lot easier. Pre-approval gives you a better idea of your price range for homes, and can even help ease the buying process. If you are pre-approved, most of the time-consuming paperwork of applying for a mortgage loan has been completed, telling a seller that your mortgage will be easier to process and finalize.

Using price comparison websites

Using price comparison websites is an excellent way to understand the different types of loans & mortgages available on the market today. With a vast array of mortgage loans including FHA, VA, USDA, fixed and variable interest rate mortgages, it can be difficult to understand what your specific mortgage loan will cost you in the long run. Take advantage of a comparison website and educate yourself about the terms and requirements of each mortgage loan, that way when you do apply, you will know if your mortgage loan rate is competitive with other mortgage loan lenders in your area, or if you need to keep shopping around.

Whether you are buying your first home or shopping around for mortgage loan options, don’t forget that Missouri Central Credit Union offers exceptional mortgage loan rates and we are happy to help with your home buying process.