Unless you have a boatload of cash lying around somewhere, applying for a mortgage is the way to owning a home for many.
What can you expect? A lot of questions, especially since loaning someone money is a risky proposition and your mortgage lender will require some assurance that you’ll pay them back.
To help you prepare, realtor.com offers up some of the most common questions your loan officer may ask when applying for a mortgage.
1. What is your credit score?
This numerical representation is an indication of how well you’ve paid off past debts. If you don’t know what your credit score is, you can find out your score for free at CreditKarma.com, or get your full report at annualcreditreport.com. You also might be able to get a free score through your bank or credit union, or another financial institution.
While lenders typically offer the best interest rates to customers with credit scores that are 750 and above, you still might be able to get a loan without a good credit score. Be warned, though: You’ll pay higher interest rates. That’s why it’s important to try and improve your score before applying for a loan.
2. Do you have sufficient credit history?
Even if you are blessed with a great credit score, you still might not have the credit issue covered. If you have a credit score of almost 800, for example, but only own one credit card that you hardly use, that really doesn’t show that you have a record of establishing credit and paying it back on time as agreed—and lenders might be less likely to lend you money to buy a home because you have what is known as “thin credit.”
With only one credit card, you might not qualify for a prime loan with the lowest interest rates, regardless of your credit score. Your loan officer may recommend that you go out and get another credit card, or take out a small car loan, and return when you have built a better track record of paying off your debt.
3. How much is your countable income?
Although someone might think they make $200,000 per year, they actually might make $100,000 per year according to an underwriter. That’s because a lender may not include any income that is sporadic, new or for something that the lender determines isn’t a sure thing.
Ending a verifiable source of income that you’ve had for years also can send up a red flag, even if you have a new source of income to take its place. You’ll want to make sure that your lender knows about any recent changes to your income—not just the amount, but where it’s from as well.
4. Have you changed jobs recently?
Moving and buying a home at about the same time you change jobs can be a problem, especially if the new job compensates you differently than the old one. If you were bringing home an $80,000 base salary at your previous job and your new one is paying you $60,000, plus expected bonuses and stock benefits, the underwriter might not count your total salary and instead use the lower base salary.
If you changed job fields, and your base pay stayed the same or improved, your loan approval may depend on your lender. Some lenders don’t care if you’ve even changed job fields completely, as long as you are a W-2 employee, while others want you to stay in a new job field for one or two years first to establish yourself before they’ll loan you money.
5. Do you have enough cash on hand?
You should have enough assets, such as cash and securities, to be able to pay for your down payment, inspections, and closing costs. An amount in reserve also is important. However, you probably won’t be able to count 100 percent of your assets for these purposes.
For instance, if you have $20,000 in the bank, your parents have promised to give you $10,000 to help with the down payment and you have $80,000 in your stock brokerage account, it sounds like you have $110,000 available to buy a house. The lender won’t see it that way. Instead, the lender will count the $20,000, assuming you can show with bank statements that it’s been in your account for a while.
The promise from your parents is less sure, so the lender might want to see the money in your account and get a signed letter from your parents stating that the money is a gift. As for the $80,000 in your stock brokerage account, lenders often knock off 25 percent to 35 percent of the value of a stock portfolio, assuming selling off a stock portfolio and other securities will incur expenses.
You also may owe taxes on capital gains and the stock market can fluctuate. The safe bet is to put your money in the bank, and keep it there for at least a couple of months so it shows on your bank statements.
6. How much other debt do you have?
Lenders compare your monthly debt payments with your income to determine whether they think you can handle your mortgage. That means you could have a great income, plenty of cash and a high credit score, and you still might not qualify for a loan. Why? All of those other monthly payments you have to make, from credit cards to auto loans.
The IRS even can derail you with back taxes. Buying new furniture for your house before your loan closes also can add a monthly expense that can throw off your debt-to-income ratio and hard your chances of getting a loan.
7. What home are you hoping to buy
You can’t control everything. For example, you could be trying to buy a condominium, and it turns out that the condo association isn’t viable by an underwriter’s standards. Sometimes a condo association doesn’t have enough insurance coverage, or other problems arise.
8. Are you single, married—or getting a divorce?
Lenders will be interested to know if you are in the midst of a divorce, or if you have other major changes going on in your life that can affect your finances. Say you’re getting a divorce in the middle of the transaction, and you don’t mention it because you think it won’t make any difference as you both still are on the loan and the divorce is amicable.
Well, if one spouse is obligated to pay alimony and child support, the underwriters will have to charge the alimony and child support as expenses. Meanwhile, the other spouse can’t get credit for those payments under underwriting guidelines, because he or she has not been receiving them for six months. In the end, it could kill the deal.