Understanding Financing Terms

3 Ways Mortgage Lenders Analyze Loan Applications

When you need a mortgage loan, you might go to a broker for help. A mortgage broker finds loans for people and works with many lenders to match them up. The broker can answer any questions you might have, including questions about how lenders analyze loan applications. If you wonder how this works, you might want to learn the following three things that lenders analyze when they receive mortgage loan applications.

1. Credit Scores

The first thing a lender might look at when evaluating a loan application is the person's credit score. Lenders always ask applicants to sign waivers that allow them to check their credit. If you work with a broker, the broker will check your credit and pass this information to the lenders they use. Lenders use different criteria for credit score requirements, but they typically have rules in place. They use these rules to determine the standards they use for approving loan applications. Your broker can help you learn more about your credit score and the work you might need to do before getting a mortgage loan.

2. Credit Utilization Rates

The second thing a lender might analyze is your credit utilization rate. This rate compares how much credit you use compared to the amount you have available. For example, if you have a credit card with a $1,000 limit. Your credit utilization rate would be 10% if you owe $100 on the card. Lenders like seeing low credit utilization rates, as low rates show that a person is responsible with their credit lines.

3. Debt-to-Income Ratios

The third factor that lenders use to analyze applications is the debt-to-income ratio. Lenders use this ratio to compare a person's monthly debts to their monthly income. When you have high monthly debt payments, you might use a lot of your monthly income to pay them, which might leave you with very little money.

Many lenders approve loans for people when this ratio is 36% or lower. Some lenders might use different percentages, though. If you want to prepare your finances for a mortgage loan, you should consider working on this figure to keep it as low as possible.

If you need help understanding these categories, talk to a mortgage broker. Your broker can help you learn more about these three things and offer tips to help you improve these areas. A broker can also help you find the best mortgage for your financial situation.

For more information, contact a mortgage company like Pacific Mortgage Group.