When you apply for a mortgage loan, you have to submit to a thorough background check from your bank or lender. There's a reason for this: Lenders want to make sure that the people to whom they are lending mortgage money can make their payments on time each month. This vetting process can prove frustrating for home buyers, but it's an important protection for lenders.
One of the most important numbers for which lenders check is your three-digit credit score. This score -- which ranges from the high 300s to the mid-800s on the FICO credit-scoring system -- tells lenders how well you've paid your bills in the past. If your credit score is high -- 740 or above -- you have a history of making your payments on time and not running up huge amounts of credit card debt. This makes you a safe borrower in the eyes of mortgage lenders. It also qualifies you for the lowest interest rates and, because of this, the lowest monthly payments.
A background check will also turn up your debt-to-income ratio, another number that lenders use to determine how likely you are to default on your new mortgage payments. As its name suggests, this ratio compares your gross monthly income with your monthly debt obligations. Most lenders prefer to work with borrowers whose monthly debts, including their estimated mortgage payments, are less than 36 percent of their gross monthly income. When lenders study your background, they determine how much money you make each month and how much you pay out every 30 to 31 days.
Lenders, too, are interested in your employment history, and they study this when determining whether to pass out mortgage money to you. Mortgage companies prefer to lend to borrowers who have worked at the same company for at least three years. This demonstrates stability; borrowers who have a longer history with a company are less likely to get fired and, because of this, less likely to default on their mortgage payments.
A mortgage background check will also turn up any negative judgments filed against you. These judgments could include a housing foreclosure or bankruptcy in your past. Your lender views such judgments as signs that you have not managed your money well in the past and that you are a high risk of defaulting on your loan. These negative judgments could persuade mortgage lenders and banks to avoid working with you.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.