What Banks Look at for Home Loans?

Buying a home is an important financial decision that calls for large sum of money. Perhaps every home seeker needs to borrow a hefty amount to own that dream home. No matter how many years it will take to pay back the borrowed amount, people yet prefer to take home loans from banks. However, planning to get a loan and evaluating the success of approval of loan are two different things. Here we are talking about what do banks look at while evaluating your application for a home loan. The banks determine your financial condition and the probability of your repayment by following certain points which are stated below.

Credit Score

Most of the banks seek a credit score of 700 or higher. An excellent credit score will get you a ‘thumbs up’ from the bank. However, the credit score alone doesn’t determine your loan approval. Having a good history of managing your debt is equally important to assure banks that you’ll pay off your loan in time.

Income-to-Debt Ratios

The banks leave no stone unturned to assure that you’ll pay back the loan. To confirm, they verify your source of income and the amount of income you receive every month. As a rule, banks want the amount of money you spend on housing costs (like mortgage, taxes and insurance) to be less than 36% of your total gross income. Moreover, they expect that your housing costs and other monthly expenses are equal to or less than 42% of your gross income. However, keep in mind that a bank will look at your overall financial position.

Down Payment

Another major factor that can approve or disapprove your home loan application is how much you can put in towards down payment of your home. It is generally expected to give in at least 20% of the total amount. There is more probability of getting loan approved if you bring more money in down payment. Your willingness to invest a large amount of your own money into the home shows that you’re resolved to living there and make the payments. Remember that some banks may ask you to provide proof of your down payment source, more so if you’ve less than perfect credit or a higher income-to-debt ratio.

Personal Situation

When you apply for a home loan, banks also determine your status and character.       Some of the major things they look for are, whether you are in good position with the professional organization you belong to, whether you have children and are less likely to shift, whether you have been recently divorced or have had a recent major financial turmoil. Though your exceptional life circumstances are not essentially reasons for rejection, they will contribute to the overall financial portrait the bank is making to assess how much risk is involved in lending you a home loan.

Location of the Property

The last but not the least factor that banks will check out is the value and location of the property you wish to purchase. This is generally done to make sure that the property is worth the amount of loan and meets the banks norms for home loans. For example, banks usually decline the loan request for homes that require extensive repairing or that fall in negative or unauthorised areas.

While applying for a loan, work over these points to boost your chances of loan approval from the bank. All the best!