When you are buying a house and getting a mortgage, lenders want to be confident in your ability to pay for the property.
As a result, during the process of securing your home loan, there are a few key things you don't ever want to say to your mortgage lender as they could raise concerns that could undermine your ability to get a loan.
Here are three things to avoid saying so you don't raise red flags.
1. "The house is in bad shape."
When you get a mortgage, the home is collateral for the loan. As a result, there can't be any major issues with the property. Although the rules can vary slightly depending on lender and type of loan, typically, you won't be able to get a mortgage loan on a property with any of the following issues:
- Mold
- Broken handrails
- Exposed wiring
- Plumbing issues
- HVAC issues
- A roof with less than two years of life
- An unstable foundation
- An active pest infestation
Lenders would generally require anything that could be a health or safety issue to be repaired before you can close. You definitely don't want to indicate to a lender that a home is in bad shape, as this could create questions about whether the home can act as collateral at all.
Of course, even if you don't point these issues out, the appraiser might as it is the appraiser's job to take note of problems that could affect the value of the home. Just be aware that if the house you're buying does have major problems, you may not be able to move forward with borrowing to buy it.
2. "I'm still figuring out where my down payment money is coming from."
Lenders need proof that you have the money for a down payment. Sometimes, a certain amount of this money must be supplied from your own funds rather than coming from a gift or other loan.
If you indicate to a lender that you do not yet have the money for a down payment -- or if you can't provide bank statements showing that you do in fact have the cash -- you're typically not going to be approved for a home loan. To avoid this problem, make sure you can meet the lender's minimum down payment requirements.
Some lenders allow you to borrow with as little as 3% down, so if you're having trouble coming up with the funds, you can consider whether a low down payment loan might be right for you. Putting a small amount does mean your mortgage will be more expensive, though. You may be charged a higher rate, you'll be borrowing more, and you'll likely have to pay for private mortgage insurance (PMI) to protect the lender in case of default.
It can be better to save up a sufficient amount of money to put at least 10%, and ideally 20%, down before you move forward with a home loan.
3. "I sure hope I can afford the payments after I quit my job next year."
Finally, lenders want to ensure that your income is stable. Typically, most require two years of work history in order to give you a loan. If you suggest to your lender that you're soon going to be dramatically reducing the income you have coming in, this could raise concerns of default.
The bottom line: You want to come across as a well-qualified borrower. You should both watch what you say to avoid suggesting you aren't and should take steps like saving a generous down payment to ensure that you are someone a lender will feel confident working with. This will make your mortgage approval process a lot easier in the end.
FAQs
These three essential factors — Credit, Capacity, and Collateral — play a pivotal role in determining your eligibility and terms for a mortgage. Let's delve into each of these C's to unravel the secrets to a successful mortgage application.
What are the 3 C's of mortgage lending? ›
These three essential factors — Credit, Capacity, and Collateral — play a pivotal role in determining your eligibility and terms for a mortgage. Let's delve into each of these C's to unravel the secrets to a successful mortgage application.
What should you not tell a mortgage lender? ›
Telling your lender you've opened up or applied for several new credit cards may not go over so well. Wait until after you finish buying the home to make those big purchases. You don't want to come off as reckless with your spending before getting approval.
What looks bad to a mortgage lender? ›
Racking up Debt
Your debt-to-income ratio – or how much debt you're paying off each month in comparison to how much money you're making – is just one factor that lenders look at when reviewing your mortgage application. If it's above a certain threshold (typically 43%), you'll be considered a risky borrower.
What lenders don t want you to know? ›
10 Secrets Mortgage Lenders Don't Want You to Know
- You don't need a perfect credit score. ...
- There's no such thing as “no closing costs” ...
- You can make extra principal-only payments. ...
- A 30-year loan isn't your only option. ...
- You can shop for mortgage lenders. ...
- Mortgage forbearance is possible.
These three pillars are the keys to effective credit analysis and can also be referred to as the 3 P's: Policies, Process and People. Policies (or procedures) refer to the overall strategy or framework that guides specific actions. Loan policies provide the framework for an institution's lending activities.
What is a 3 3 mortgage? ›
Your monthly payment stays the same for the first three years. After that, it can adjust only once every three years. No Private Mortgage Insurance (PMI). Max loan amount for one unit is $2 million. Max Loan to Value is 95% for qualified borrowers.
What is a red flag in mortgage? ›
Red Flag #1: When they offer you a rate that's lower than the APR. When a mortgage's APR is much higher than the actual rate, it means that the fees are a lot higher, too - and you'll be paying them over the life of your loan. A low rate might be enticing, but you have to consider the long-term cost.
What question is a lender not allowed to ask? ›
Lenders ask questions to assess your risk level as a potential borrower. Lenders aren't allowed to ask questions regarding sexual orientation, medical history, disabilities, political or religious beliefs and plans for family expansion.
What is the best mortgage rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.
Can lenders see your bank account balance? ›
Your lender typically needs to verify your income to ensure that you have enough money coming in to make your monthly payments. They also check your account balance to confirm that you have enough money in your account to cover a down payment.
What is a toxic lender? ›
Essentially, the lender continues to make money as he converts the debt into common shares — even if the stock is plunging and eventually falls to zero. Toxic financing can come in the form of convertible debt or convertible preferred stock.
What two types of loan should you avoid? ›
Here are six types of loans you should never get:
- 401(k) Loans. ...
- Payday Loans. ...
- Home Equity Loans for Debt Consolidation. ...
- Title Loans. ...
- Cash Advances. ...
- Personal Loans from Family.
Conventional loans
Conventional loans have higher minimum credit score requirements than other loan types — typically 620 — and are harder to qualify for than government-backed mortgages.
Which loan company is easiest to get? ›
The Easiest Personal Loans to Get in September 2024
- LightStream: Our top pick.
- SoFi: Best customer service.
- PenFed: Best for small loans.
- Discover: Best for low rates.
- Upstart: Best for bad credit.
- U.S. Bank: Best for bank switchers.
- Upgrade: Best discounts.
- Wells Fargo: Best for in-person service.
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
What are the 5 Cs of mortgage lending? ›
The 5 C's of credit are character, capacity, capital, collateral and conditions. When you apply for a loan, mortgage or credit card, the lender will want to know you can pay back the money as agreed. Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more.
What are the 4 Cs of lending? ›
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What are the six basic Cs of lending? ›
The 6 'C's — character, capacity, capital, collateral, conditions and credit score — are widely regarded as the most effective strategy currently available for assisting lenders in determining which financing opportunity offers the most potential benefits.
