If you are in the market for a mortgage, you might think that lenders use some arcane formula to make their decisions — one that your average consumer simply cannot understand. The criteria mortgage lenders use is actually much simpler and down to earth.

Understanding what mortgage lenders are really looking for is essential for all homebuyers and sellers.

Banks and other mortgage lenders have tightened up their lending standards in recent years. They are taking a much harder look at their buyers’ finances and job prospects, and they are reviewing all submitted documents more carefully. That does not mean that you will not qualify for a mortgage, but it does mean you need to have all your ducks in a row before you start shopping for a new home.

Lenders also scrutinize the property by sending an appraiser to view it and confirm that the price that the buyer has agreed to pay is within the range of the property's current market value based on other comparable homes that have sold in the immediate area. The appraiser also reports issues that might affect the lender's ability to resell the house later on.

Upgrade or First-time Buyer?

Whether you are a first-time buyer or in the market for an upgrade, you can be sure the lender will scrutinize your credit history carefully and take a close look at your credit score. While a credit score on the lower end of the spectrum does not necessarily doom your chances of getting a mortgage, that low score could mean a higher interest rate.

Some lenders do set minimum credit scores for the mortgages they write, so it is a good idea to boost your credit score as much as possible before you start shopping. Taking on new debt before buying a home is not advised because it will lower your credit score. Paying down credit cards MAY be a good idea, but it is best to talk with a knowledgeable mortgage loan officer to determine if that makes sense for you. Your real estate agent should be able to match you with a reputable lender that can help you determine the best way to prepare to apply for a mortgage. Ideally, that should happen a few months before you think that you will make an offer on a property. Since errors on credit reports are not uncommon, that will allow time to correct anything that might come up.

How’s Your Credit Score?

That probably depends on who you ask, since there are three credit bureaus and a number of credit scoring methods. 

Mortgage lenders use a specific credit score model and will check all three credit bureaus. They will typically use the middle credit score. In the case of multiple buyers, they will use the lowest of the scores.

Even if you have a stellar credit score, the mortgage lender will want to make sure you can afford the monthly payments. The lender will carefully analyze your confirmable income, fixed expenses, and debt. The results of that analysis will tell the lender how easy (or difficult) it will be for you to afford the monthly payments.

This analysis will include not only the monthly mortgage payment but all housing-related expenses — things like property taxes, mortgage and homeowners insurance and any homeowners association fees. Your own analysis should include those same factors. You may find that shopping for a less expensive home makes sense, especially if the monthly payments would be a stretch financially.

Analyze and Approve

You can count on the lender to review and carefully analyze the appraisal for the property you have in mind. In some cases, the lender may require a second independent appraisal before approving the loan. No matter what type of home you are looking at or what size mortgage you need to make it happen, it is important to gather as much information as you can. Knowing what mortgage lenders are looking for can improve your chances of getting the loan you need and make the entire home buying process a lot easier.

At Greater Boston Home Team, we are experts in all phases of the financing and home buying process. We work with only the most reputable and competitive lenders. Please feel free to contact us for a referral or with any questions that you might have about home buying or selling.