Qualifying For A Mortgage Overview
One truth is that a mortgage loan will hold your home and land as collateral. In most cases, the lender doesn't want to take over your home. They want you to succeed, and they want you making the monthly payments that make the U.S. go round. The lender will review your financial situation before you apply for a loan. Here are some of the things they will look at before granting you a mortgage.
Deposit Payment
Lenders prefer a down payment of 20% of the home's value. Many mortgages will require a lower down payment. Your lender will be more attentive if you put less down. Why? You can lose less by walking away from a loan if you invest less in your home. Private mortgage insurance (PMI), which is required for most loan types, will be required by your lender if you cannot put down 20 percent. This protects the lender from any losses. There are, however, loan types that don't require PMI, such as VA loans.
LTV
When underwriting a loan, lenders consider the Loan-to-Value Ratio (LTV). To calculate the LTV, divide the loan amount by the appraised value of the home. For example, if your loan amount is $70,000 and your home is valued at $100,000, your LTV will be 70%. This is a low LTV due to the 30% down payment. Even if your LTV is 95 percent, you can still qualify for a loan. However, the interest rate will likely be higher.
Debt Ratios
You should consider two ratios of debt to income. The first is to look at your housing ratio, also known as the "front end ratio." This is your monthly home payment, plus any other costs associated with homeownership (e.g., condo fees). Divide this amount by your gross monthly earnings. This will give you one-third of what you actually need. The second is your debt ratio, or "back-end ratio." Add all of your monthly installments or revolving debt (e.g., credit cards, student loans, and alimony) to your housing costs. Add that to your gross income. Your debt ratios are now calculated. It should not exceed 28 percent of your gross monthly earnings for the front and 36 percent for the back. However, guidelines can vary. High-income borrowers may be able to have ratios closer than 40 percent or 50 percent.
Credit Report
Lenders will conduct a credit check on you. This record will include your credit history and will give you a score. Your lender will review the three most popular credit scoring models. They will then use the median score from each model for qualifying purposes. Higher scores mean a better chance of borrowers repaying the loan. What is a good score? FICO, which stands for Fair Isaac Corporation, is the standard. Scores range from 350 to 850. FICO's median score of 723, 680 or more is the minimum score required to get "A" credit loans. Different lenders will treat your scores differently, but generally speaking, the higher the score, the better the interest rate.
Automated Underwriting Systems
No longer are lenders willing to sit down with customers and go through your loan details. Instead, an automated underwriting program, which analyzes your credit score and debt ratios, can quickly determine if you are eligible for a loan. Most lenders use an AUS to pre-approve borrowers. While you still have to provide some information, the system will take your word for most of that. You'll need to prove that the information you provided to the AUS was correct later.
