Buying a home is an exciting and nerve-racking process. Your ability to prove to the lenders that you are a responsible borrower is crucial to getting approved for a mortgage loan that you need. In this article, Mike Eisenga, real estate investor and entrepreneur, shares his tips on how to show lenders that you are a good credit risk.
As a President of both American Lending Solutions, a mortgage lending company, and First American Properties, Michael Eisenga knows firsthand what lending companies are looking for in a reliable borrower and how to show them that you are a good credit risk.
In general, lenders account for factors such as your credit history, amount of debt, and recent inquiries on your credit report, along with a predictable income stream and an overall debt-to-income ratio.
What do lenders look at on your credit report?
While reviewing your application for a mortgage loan, financial institutions examine your credit report, check if you’ve recently applied for credit cards or loans, your payment history, credit utilization, bankruptcies, dispute statements, and so on. It is recommended that you do not apply for credit cards six months before applying for a mortgage loan. Additionally, make sure that you pay the credit cards you have on time and preferably in full every month to ensure that your credit score is as high as possible.
What is the debt-to-income ratio, and why is it important?
Your debt-to-income ratio is a comparison of your debt to your profits annually. Usually, if your ratio is 36% or below, you are considered a reliable borrower who can afford to take on more debt. However, if your ratio is over 50%, you may be overspending, and it is a red flag to lenders who may be concerned about your ability to repay your mortgage. If you are not sure about your debt-to-income ratio, you may want to use one of the free calculators available online.
Why do lenders ask for your bank statements?
Although this is not as crucial to lenders as your credit score or debt-to-income ratio, they often want to consider your assets, such as savings and investments. Money available in your checking and savings accounts, retirement accounts, stocks, bonds, and so on usually show lenders that you are less risky than someone with no assets. Usually, if you have more savings, you are better equipped to put down a solid down payment on your home and make your payments even if you lose your income temporarily.
Many factors contribute to your ability to prove to lenders that you are a responsible borrower. Ensure that you are prepared for a large purchase such as a home by saving enough money for a down payment and making yourself more attractive to the lenders by showing your consistent streams of income, assets, and good payment history on your credit cards and loans.
Michael Eisenga is a commercial real estate investor, entrepreneur, and proud father of three boys. His wide range of skills includes commercial real estate investing, property management, assisting living facility operation, leadership, strategic planning, public policy, and community outreach.