To approve or not to approve? Which loans banks decide to fund can seem a little mysterious, and often leaves applicants feeling somewhat helpless. This information should help to clear the air a bit. Before you read on, please note: the approval process varies greatly by lending institution, but there are a few industry standards, like the ones listed below, that a lender considers when deciding which loans to approve.
Information your bank may look at
To understand your financial habits, lenders will pull your credit report from one or all three major credit-reporting bureaus for each borrower. They'll look for any major prior events, like bankruptcies, collections, and foreclosures, as well your payment history on your credit accounts. Typically, lenders will review two years of credit history for each borrower. How much debt your owe is another factor that lenders will look at, so your debt payments should be under a certain threshold, known as debt to income (DTI). Other information they may take a look at includes:
- Your current or reasonably expected income or assets
- Your current employment status
- Your estimated monthly payment on the mortgage
- Your monthly payment on any other loans
- Your estimated monthly payment for obligations related to owning the mortgage and house
- Your current loans—student, car, credit card, etc.
- Your monthly debt-to-income ratio
- Your credit history
Your credit history
This is how much money you pay out each month compared to your income, which is shown as a percentage. Each lender has a slightly different threshold and will accept or reject your application based on that number. To find yours, simply add up all of your debt payments each month (car loan, credit cards, etc.) and then divide that number by your monthly gross income, which is your income before taxes.
For example, if you have one credit card payment for $100, a second credit card payment for $75, and then a car payment for $300, your total monthly debts are $475. Let's say you make $3,000 a month before taxes. $475 divided by $3,000 is 15.8%, your DTI. Generally speaking, you want to keep your DTI below 30% to ensure you are able to get approved.
What documentation will I need to provide?
Again, this varies greatly by lender. But in general, here are some documents that you may be expected to submit:
- W2 forms from the last two years
- Most recent full month's paystubs
- Tax returns from the last two years
- Year-to-date profit and loss statement (if applicable)
- Financial statements (checking, savings) from the last two months
- Source of the down payment—they will need to know if you receive a gift from a family member, if the funds are proceeds from the sale of a home, or if you saved up over time.
Approvals and denials are all based on the documentation you provide and your individual financial situation. If you do get declined, remember that doesn't mean you won't be approved in the future. Your lender let you know exactly why you were declined and may provide assistance on what you can do to make sure you'll be approved when you're ready to try again.
We're here to help!
At WaFd Bank, we know navigating the buying and selling process can be tricky. We've been specializing in helping people achieve their home ownership dreams for over 105 years. To find out more, contact one of our neighborhood branch managers or call us at 1-800-324-9375.