So, you are trying to get pre-approved for a mortgage loan to buy a new home, but you are worried about the process and what kind of things might impact your approval. It can be hard to fully understand what factors play the biggest part in determining whether or not you will actually be able to get approved for a loan. We will discuss what aspects of your loan application and personal finances will have the largest influence on a mortgage lender’s decision to approve you for a loan.
Loan-to Value (LTV) Ratio
The Loan-to-value ratio is an extremely important metric lenders use to determine how much they will be able to loan to their customers. It is calculated by dividing the total loan amount by the value of a home. Most lenders set limits on how low the LTV can be set.
In Ireland, first time buyers must have a minimum deposit of 10% of the value of the property. For second time buyers this percentage is increase to 20%. The lower your LTV the better, and you can decrease your LTV by either paying more cash up front with your deposit, or buying a less expensive property.
Mortgage lenders will pull information on your credit history from credit reporting organizations like the Central Credit Register and the Irish Credit Bureau (ICB) as a part of the mortgage application process. They evaluate your credit to get an understanding of your payment history and whether or not you pay all of your bills on time.
If you are worried about your credit history then you should take time before your mortgage application to sort out and organize your personal finances, pay off old debts, and make consistent payments on credit to improve your credit rating.
The Debt-to-Income is another important metric like the LTV that lenders use to determine your proportion of regular monthly debt payments to your regular monthly income. These regular debt payments can come from outgoings such as student and auto loans.
With DTI ratios lower is always better. The lower the ratio, the more likely you are to get approved for your loan. Typically a DTI below 36% is a good ratio for getting approved for a loan. Anything too far above that percentage and you may find that you will have more trouble getting approval for a mortgage loan.
Employment and Income History
Lenders also want to ensure that you have a stable source of income before approving you for a loan. Steady income indicates that a home buyer will likely not have trouble keeping up with regular payments. A stable source of employment means that the home buyer will likely remain employed and receiving income for the entire length of the loan.
In order to determine stability of income and employment lenders usually like to like to see the last 2 years of a home buyers income tax forms and contact information from their current employer. This is all done to ensure that a borrower can handle the significant financial burden that comes with using a mortgage loan to buy a house.