The last two years of your life are very important to a mortgage lender. They will want to know everything about your income, assets, credit and employment during this time period. These facts about your life let the lender know many things about you, including your ability to have a consistent, stable life. A consistent history lets lenders know you possess the ability to handle responsibilities, such as a mortgage in your life.
Employment and Income Stability
One factor lenders look for on a regular basis is employment and/or income stability. If you have bounced from job to job over the last few years, you are not considered a stable applicant. When changing jobs, you are also changing your income, which plays a role in your ability to pay your bills. A flighty job employment history will typically result in a denial of your loan. At the very least, lenders look for you to have jobs in the same industry, if a job change must take place, but they will scrutinize this situation very closely to ensure themselves of your decreased risk of defaulting on your loan.
Credit Reports Show Reliability
Your credit history shows the lender your knack for being reliable. If you have many late payments or outstanding balances, your reliability factor is greatly decreased. Lenders are looking for a credit history with timely payments on many accounts. If you have many accounts available but none of them have a balance, you will have a hard time showing your ability to pay your bills on time. It pays to utilize your credit as long as you are going to pay it before the due date, especially during the two years leading up to your mortgage application.
Credit Reports Show Responsibility
Another trait your credit report can demonstrate is responsibility. If you have the ability to have many credit accounts, you need to be able to be responsible with them. Lenders look for sparing use of your credit accounts. This means only having a fraction of the credit line outstanding. Typically, anything less than 30 percent of the outstanding balance is considered good. In general, if you have many accounts, you should spread out the use of them evenly, leaving some credit cards untouched as well. This shows lenders you know how to stay in control and within your financial means.
Another factor lenders put a lot of stock in when analyzing an applicant is consistency. If you bounce around from residence to residence, work several jobs and have a low-to-average credit score, you are not going to be considered consistent. Lenders look closely at your credit report to see things beyond your credit usage. They also look at your employment and residence history, looking for a pattern of consistency. If you do end up having to move several times within a 2-year period or you change jobs several times, you should have a thorough explanation for these occurrences ready for the lender. Most banks will require you to write a letter of explanation in cases like this in order to give the underwriter something to evaluate when determining if you are a risky loan applicant.
Being able to look like a strong applicant takes a lot of hard work. In the years leading up to your mortgage application, you should take careful consideration of everything you do including remaining as stable as possible. The fewer homes you live in and jobs that you hold, the more responsible you will seem. In addition, the fewer outstanding credit accounts and late payments you have, the more worthy your credit will be. In general, lenders are looking to decrease their risk of default which is why they really delve into not just your current status, but also your history going back 2 years. It helps them to establish a pattern that can be used to judge your risk of defaulting on your loan.