Mortgage Approvals and Credit History
Due to the fact that a qualifying property is being put up for collateral with a mortgage, lenders are more lenient as far as what they are looking for in terms of a credit history in order to approve a mortgage.
This does not mean that they are willing to not pay attention to credit history, and one’s credit score and history does factor into mortgage lending decisions a lot, it’s just that the bar isn’t as high as it is with unsecured lending.
In addition to the fact that a mortgage is collateralized, people simply put more effort in not defaulting with their mortgage than they do with other types of loans, and mortgages tend to be the most protected form of debt and the last to go when one encounters financial difficulty and cannot keep up with their debt obligations.
This distinguishes mortgages with things like secured car loans, because people will almost always give up their car before they will give up their house. If you default on your car loan, this will mess up your credit for quite a while but you can still buy another car, although probably not as nice. You may not be able to make a car payment now but you can look to get something where you don’t have to.
With a mortgage, if you default on it, you can’t just shell out a little money and buy a cheap house, as even cheap houses almost always require a mortgage, and people who can’t pay their mortgage obviously don’t have the money to put out for a new house, and far from it, or they would just make their mortgage payments.
Since past credit problems are still a red flag, as they represent more risk to the lender statistically, these still matter and we always want to avoid late payments, and especially defaulting on debt obligations. With mortgages, lenders are often willing to look the other way where minor difficulties have been encountered, provided that the borrower can provide an acceptable explanation as to what happened.
So even prime mortgage lenders will tolerate at least some problems, things that would completely exclude one from getting approved for a regular loan or line of credit with them, provided that the problems weren’t too severe and that they less likely to happen again. The reason is once again that people can do things like miss loan or credit card payments but still make the payments on their mortgage, the same way as they would be likely to still make their rent payments.
If someone has had issues with a timely repayment of their mortgage though, this is seen as more serious, and usually will prevent an applicant from being approved by a prime lender and require that they instead seek a mortgage from a subprime lender who have lesser standards and higher rates to go along with them.
Credit history for a mortgage doesn’t just include looking at one’s score and history or repayment. Lenders will also look at things like the type of credit products that the client has, and often want to make sure that there is both an installment loan and revolving credit, as well as how long the products have been open, to ensure that clients have sufficiently demonstrated a good history of handling debt.
During the application process, applicants will have the opportunity to see if their credit history does indeed meet the minimum standards of a lender they are applying for a mortgage with, and you can usually have a good idea of where you stand right there.
Income Requirements And Debt Servicing Ratios for a Mortgage
All credit products have income requirements, because otherwise clients would not have the capacity to make timely payments on the money borrowed. It is all about assessing risk as far as whether or not an applicant is deemed worthy enough to lend to, and mortgages are certainly no different. In fact, given that the amounts loaned out with mortgages are considerably higher than with other personal lending products, there is even a greater need to ensure that the payments involved can be reasonably handled.
This all has to do with how much an applicant can handle as far as overall payments go, and lenders take several things into account here, not just the mortgage payment. The ratios used, the percentage of one’s income that is proportioned to debt maintenance, is similar to ratios used for other lending products, as if one does not have the ability to pay back the money loaned to them, this is going to be a problem regardless of the lending product.
People seek and apply for a certain amount when they apply for a mortgage, and these ratios are used to decide whether the requested amount is reasonable and fits the minimum standards of the ability to repay the debt. Should one’s debt ratios not fit a requested amount, a lower amount is usually offered.
So, if one’s credit history is sufficient, this qualifies the prospective borrower for a mortgage of a certain amount, and the ratio of their income to debt, including the mortgage payments, will determine the amount approved for. The amount that may be approved may or may not fit the needs of the borrower, for instance it may not be possible for them to buy a suitable property for the amount that could be approved, and they may have to wait until their circumstances change.
Subprime lenders, due to their higher rates, are usually a little more tolerant when it comes to debt ratios, but even they don’t go much over what prime lenders consider a serviceable debt load, because that still represents too much risk to them.
The income that is used in the equation must also be stable, with a likelihood of continuing. Income from any source may be considered provided it meets this standard. This includes things like self-employment income or investment income, although lenders will need applicants to demonstrate that this income is stable enough by showing two or more years of it, and averaging it over that time for the purposes of calculation.
The standards here aren’t too stringent even among the banks, and they just are looking to avoid situations where there is clearly too much risk involved in lending. Banks are in the business of managing risk though and are willing to take on a certain amount, but not too much over that.
This is based upon the interest rates they charge, and a certain percentage of defaults are built into the rates, but if they take on more they will not achieve their objectives in extending mortgages.
Looking to get one’s ratios in line is therefore an important component of looking to position oneself to get approved for a mortgage, and if one is unsure of where one stands and may benefit from some advice if needed, starting the process can be a good idea sooner rather than later so one can have a better idea of where they stand and can make adjustments if needed, such as paying off certain debts first or consolidating debt to lower payments.
While seeking a mortgage approval does not really require much knowledge, and the best way to proceed if one seeks a mortgage is to simply apply for one, having at least some idea of the things that lenders look for prior to granting a mortgage can indeed be helpful.