In the market for a home but worrying if you qualify for a mortgage? Knowing how lenders determine whether you qualify for a mortgage can give you a step up on getting the best deal on your dream home. Here is a quick guide on what lenders are looking at:
CREDIT SCORE
The first thing all lenders look at is your credit score. Most lenders usa a score known as FICO, a computer-based scoring model that ranges from about 360-900. 800 is a dazzling number to lenders. A score in the 700s is good. Scores in the 600s are slightly more trouble but if your score is down in the 500s or lower – financing will be tough to get, and very expensive.
The FICO formula grades five areas of your credit history. Past Payment History, Outstanding Debt, Length You’ve Had credit, New Credit Applications and Types of Credit you have all go into raising, or lowering, your score. Two key areas you can improve your FICO is to not make a lot of credit applications, and make sure all your payments have been current for at least the last several months.
CREDIT HISTORY
Lenders will consider any problems you may have had in the past. Most lenders are loathe to see current court judgments or any accounts showing a current past due. You are almost always better off trying to get everything paid off and settled before you apply for a mortgage. Also, any application that shows a past history of foreclosures or bankruptcies will get a much more careful scrutiny, even if the problems were many years ago.
JOB STABILITY
Lenders like to see borrowers with a steady history of 2-3 years in their job – or at least working in the same profession. If you’ve just changed jobs or professions, they will be worried that your job might not work out.
RESIDENCE STABILITY
Another important factor for many lenders is stability in where you live. Have you already owned a home? That’s great but what concerns lenders is that you don’t move too often. They would like to have their loan out for several years making them a profit. A history of moving every 12 months cuts into their profits, and makes it a less desirable loan for them.
INCOME
DO you make enough money to make the loan payments? This is especially critical for the self employed. Unlike recent years where “no doc” loans where the rage, lenders need to see document-able income. bank records, receipts and income tax filings all help prove your income.
DEBT RATIO
How much are you paying in debt now and after the loan? Lenders normally want to see the amount you pay on your bills to be no more than 36%-42% of your income.
The lender will take your monthly debt and mortgage payments and divide it by your monthly income. The lower the number, the better.
COLLATERAL
The more valuable the property, the safer the loan is for the lender. Also, properties that are located in desirable neighborhoods with active real estate market means the likelihood the collateral will go up in value. A good thing, if the lender ends up owning it through foreclosure.
DOWN PAYMENT
The more money you put down on a property, the more you lose if you don’t pay. Lenders adore buyers who have a significant down payment to make. Lender adoration equals better terms for you.
IT DOESN’T ALL HAVE TO BE PERFECT
Have high scores in all areas and lenders will welcome you with open arms, but it doesn’t all have to be perfect. Lenders consider your entire application before they determine whether you qualify for their mortgage program. You can have a few small problems in one area, and still be approved with no problem.
It is a great idea to look at you through a bank’s perspective. Knowing what they look at, would you look good as a borrower to them? If so, great! If there are some problems though, consider ways you can improve your situation to get the loan you need approved.