what checks do mortgage lenders do

What Checks Do Mortgage Lenders Do? A Complete Guide

Getting approved for a mortgage loan is no easy feat. Mortgage lenders scrutinize applicants carefully to ensure they can repay the loan. This means undergoing multiple checks on your finances, employment credit and more.

As a mortgage applicant, it helps to understand what exactly lenders are looking for during the underwriting process Being prepared can prevent potential issues that lead to delays or denials This comprehensive guide will walk you through the key checks mortgage lenders conduct and how you can get mortgage-ready.

Credit Checks

Your credit report and scores are a top priority for lenders in assessing your mortgage eligibility. Here are the credit-related aspects they zoom in on:

• Credit scores – Most lenders require minimum FICO scores of 620 or higher. The higher your scores the better your chances.

• Payment history – Lenders want to see a track record of on-time payments for all credit accounts. Late or missed payments require explanations.

• Credit utilization – High balances close to your credit limits are seen as risky. Experts recommend keeping utilization below 30%.

• Credit inquiries – Too many new credit applications in a short period can raise concerns and require scrutiny.

• Derogatory marks – Bankruptcy, collections, charge-offs and other negative items call for closer inspection of your finances.

• Credit history length – Older established credit demonstrates stability and lowers risk.

To boost your creditworthiness, pay all bills on time, lower balances, and avoid new credit applications in the months preceding your mortgage application.

Income and Employment Verification

Lenders need solid proof you can afford mortgage payments long-term. They verify this by examining:

• Income stability – Multiple years at the same job or in the same field reduces risk. Changing jobs recently may require more documentation.

• Income documentation – Lenders require tax returns, pay stubs, and sometimes even direct employer verification to confirm your income.

• Income amount and continuity – You must prove your income level is high enough to support the mortgage payment plus other debts and expenses. Bonuses and overtime pay may require additional documentation to be counted.

• Employment gaps – Be ready to explain gaps of 30 days or longer on your resume. Provide documentation like school transcripts or medical records.

• Secondary jobs – Part-time work or side gigs can supplement your qualifying income if you supply formal documentation like tax returns.

Avoid job changes right before applying. Boost your income with extra work if needed and maintain thorough records.

Debt-to-Income Ratio Assessment

Your debt-to-income ratio or DTI compares your total monthly debt payments to your gross monthly income. Lenders typically require DTIs of 43% or less. To calculate your DTI:

1. Add up minimum payments for all debts like credit cards, auto loans, student loans, personal loans, child support, alimony, etc.

2. Divide the total by your gross monthly pretax income.

If your DTI exceeds 43%, options include:

• Increasing your income through a raise, promotion, second job or bonuses

• Paying down high-balance debts aggressively

• Consolidating debts into a new loan with lower payments

• Adding a co-signer with higher income to strengthen your application

Sufficient Down Payment and Reserves

Down payments of at least 20% of the home’s purchase price are ideal for conventional mortgages, but options exist for as little as 3.5% down. Lenders also want to see:

• Down payment funds legitimately sourced in your accounts, seasoned for 60+ days

• Enough savings left over after the down payment to cover emergencies

• Documentation on any gifted funds from relatives

• No large unexplained deposits which could indicate borrowed funds

If you can’t make a 20% down payment, explore low down payment mortgage options like FHA or VA loans. And start saving early so funds are seasoned.

Property Appraisal

Lenders hire professional appraisers to ensure the property is worth enough to justify the loan amount. If the appraisal value comes in lower than expected, you may have to provide extra cash or the lender may decrease the amount you can borrow.

Home Inspection

While not required, a home inspection can uncover issues with the property. Fixing problems before closing saves headaches later. Inspections also ensure you and the lender know the true condition of the home.

Proof of Home Insurance

Lenders mandate home insurance to protect the property serving as collateral for the mortgage loan. Confirm the policy covers any lender requirements and provide documentation well before closing.

Documentation Review

In the final days before closing, lenders verify all paperwork including the mortgage contract, deed, title insurance policy, home insurance paperwork, and more. This protects both you and the lender.

The Bottom Line

Preparing for the underwriting process helps mortgage approval go smoothly. Monitor your credit, maintain solid income and employment, lower debts, save for a down payment and provide organized, thorough documentation. With diligence and patience, you’ll check all the boxes mortgage lenders are looking for.