Applying for financing

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When evaluating loan applications, lenders consider several key factors to assess the creditworthiness of applicants. These factors provide insights into an individual's financial stability and ability to repay the loan. Here is a brief introduction to what lenders typically look at. Lenders take several factors into account when assessing loan applications:

1. Credit Score: Most lenders require a credit score of 680 or higher for loan approval. To qualify for the best interest rates, a credit score of 750 or above is typically necessary.
2. Down Payment and Assets: Lenders generally expect a percentage of the loan amount as a down payment. The amount you have saved for a down payment determines the loan size you can qualify for. Additionally, lenders assess your overall financial assets, ensuring you have funds available even after the down payment and closing costs are covered.
3. Employment History: Consistent employment in the same field for at least two years is preferred by most lenders. Self-employed individuals may need to provide additional documentation to verify income.
4. Income: Traditionally, lenders aim for mortgage payments to not exceed 28-33% of your gross income per month. This figure, known as the "front-end ratio," is calculated using pay stubs or two years of tax returns.
5. Debt: Lenders typically require that monthly payments on existing debts do not exceed 36% of your gross income. This percentage, referred to as the "back-end ratio," allows for some flexibility depending on the situation.

By considering these factors, lenders evaluate an applicant's financial situation and assess the level of risk associated with extending credit. Meeting the requirements and demonstrating financial stability increases the chances of loan approval and may result in more favorable terms and conditions. 

Considering your budget

Although lenders primarily focus on income, debt, and down payment, it is crucial to examine your complete budget. Expenses such as food, utilities, entertainment, and childcare should be considered. Your budget extends beyond just debt payments. While factors like income and expenses may change after purchasing a home, creating a budget provides a more accurate understanding of what you can afford. Subtract your expenses (excluding current rent) from your income to estimate the monthly payment you can comfortably manage. Remember to account for property taxes and homeowners insurance as well.

Common documentation

Personal: 

• Driver’s license
• Social Security card
• Divorce decree (if applicable)
• Proof of veteran status (for VA loan)

Employment/Income:

• Federal income tax returns for the previous two years
• W-2 forms for the previous two years
• Pay stubs for the previous 30 days
• Proof of additional income, such as Social Security benefits, child support, or alimony (if      applicable)
• Previous two years’ and year-to-date profit and loss statements (if self-employed)
• Balance sheet for the most recent quarter (if self-employed)

Assets:

• Statements for checking and savings accounts for the last three months
• Statements for retirement funds and other investments for the last three months
• Titles for automobiles and other property
• If part of the down payment comes from a gift, a gift letter stating that the funds do not need to be repaid

Liabilities:

• Most recent statements for credit cards, loans, and other credit
• Canceled checks (or other proof of payment) for rent or mortgage for the last 12 months
• Court documentation for bankruptcy or judgment (if applicable)
• Listing agreement or sales contract for current home (if applicable)

Properties:

• Sales contract
• Proof of earnest money deposit
• Proof of homeowners insurance (needed before closing)
• Contact information for homeowners association (if applicable)

Keep in mind, lenders can have different documentation requirements. Be sure to confirm with your lender what documentation you need to provide.