Mortgage Affordability: 4 Things Your Bank Will Take Into Consideration

3 Feb

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Applying for a mortgage can be a scary venture. Although banks require a standard mortgage application form from all potential clients, there are many factors that go into the decision of whether or not someone is suitable to lend to. Having these 4 things that almost all banks take into consideration before giving out loans will greatly increase your chances of receiving a stamp of approval on your mortgage application.

Credit History
Your credit history is a huge part of whether you’ll be approved for an additional line of credit in the form of a mortgage. Things like credit cards and car loans all contribute to your credit worthiness. You should check to see what your credit history looks like before applying for a loan that may be outside of your means.

Personality
Making a strong impression when visiting with a bank employee about a loan is extremely important. Although banks make most decisions based on bottom-lines, if you don’t make a good first impression with the bank, there’s a slightly higher chance that your loan will be denied. Be cordial, dress well, and thank the bank employees for their time to ensure you get an upper-hand when they pass the application on to their supervisor.

Proof of Income/Expenses
Along with a solid credit history, banks also like to ensure that their loans are issued to people capable of paying them back in a timely fashion. Loans are risky for banks to issue, so make sure you have a large enough income to cover the cost of a monthly mortgage. A good rule of thumb to follow is that your monthly earnings should be 3 times that of your mortgage payment. On your mortgage application, you will also be required to express your monthly expenses. Banks use a formula to determine whether your monthly income is large enough to cover both a mortgage and your current monthly expenditures.

Equity
Finally, banks like Clydesdale Bank in the UK and WellsFargo in the USA (and others) will consider how much equity you have. Equity is a measure of your total net worth and banks use it as a way of determining how risky a mortgage may be to give out. Should you fail to repay your loan, a bank must determine whether they can sell the house to cover the value of the mortgage that you default on. This, along with other equity you may have, helps a bank form a complete picture of your financial soundness.

Applying for a mortgage is a huge step in everyone’s life and isn’t something you should rush into. Having your financial history in good standing will make the process of applying for a mortgage much easier.

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