How Lenders Assess You

These Main Factors Are Required To Qualify You For A Loan

Affordability

Lenders calculate your debt-to-income ratio (DTI), showing how much of your income will go towards your bills. Lenders will allow you to spend up to 43 percent of your income on housing and other bills.

Credit Health

Lenders will pull your credit reports from Equifax, TransUnion, and Experian. They then base their loan approvals on the average of these three scores. Lenders will pull your credit reports, which will include scores. They also take into account your entire credit history. Your lender will not use your credit scores if you do not run them. They must pull your reports, and they will most likely give you a different score than what you can get as a consumer.

Down Payment

Lenders take into account your down payment, and the amount of money left after closing on a home. They compare this to the DTI to determine how quickly you can build up reserves. Lenders will allow very little down, and not all loans require any money after closing. However, even in these situations, it is important to consider whether you would like to purchase a home without any reserves.

Prepare Before You Pay

Planning for mortgages is more than just budgeting for a downpayment. When buying a house, you will need to plan for three types of cash to close.

Deposit Payment

Everyone can make a down payment of as low as 3 percent for a conventional loan or as low as 3.5 percent for an FHA loan. A minimum of 20 percent down payment is required if you want to avoid paying extra monthly mortgage insurance.

One Time Closing Costs

These fees include title insurance, transaction settlement fees, lender and appraisal fees, and home inspection fees.

Prepaid Payments Payable At Closing

It might happen in the middle of a month or during a local property tax season. The interest you pay on your mortgage over the remaining month is prorated. You prepay it at closing. The same applies to property taxes. Lenders will require that you prepay one year of homeowner's insurance when you close. If you are getting a loan that requires that you save money for property taxes or insurance by making monthly payments into an account, you will have to prepay this account -- it's called an "escrow" or "impound account."

The Federal government offers a program called Know Before You Owe that requires lenders to use a standard format to disclose cash-to-close line items.