Today, applying for and obtaining a mortgage loan is not difficult. You can walk into any local banking center and ask the next available teller, search online, or peruse the Sunday newspaper for local and national mortgage brokers. However, obtaining a mortgage loan you can afford that later will not end in foreclosure is the challenge. When reviewing a loan application, a financial institution, will consider the following criteria for approval: credit score (FICO Score), debt to income ratio (DTI), and collateral loan to value (CLTV).
1. Credit Score
At least six months prior to seeking a mortgage loan, contact one of the three major credit bureaus (Experian, TransUnion, or Equifax) to obtain a copy of both your credit and score reports.
Review your credit report for accuracy and identity fraud. The credit report contains information on all of your open and closed accounts, payment history positive and negative, history of your account balances, requests for your credit history, and your personal information. If discrepancies are noted, contact the credit bureau immediately to dispute or correct. This process can take several months and may require you to contact all three credit bureaus; so the sooner you start the better.
It is also important to review and understand your score report. Your credit score is a number typically between 300 and 850, based on a statistical analysis of your credit files. Primarily, the basis of the credit score is credit report information from the three major credit bureaus. The credit score also takes into consideration your payment history, account balances, and more. To the financial institution reviewing your application for a mortgage loan, the credit score represents creditworthiness or the likelihood that you will pay your loan.
2. Debt to Income Ratio (DTI)
Develop a plan to pay off your debts if you currently are not debt free. When considering loan approval, the financial institution will calculate the monthly payments of all existing debts and divide the total by the income received per month. Typically, if this percentage exceeds 35% the loan applicant is considered a lending risk and subject to a higher interest rate.
Being debt free does not guarantee a better loan. Remember, regularly scheduled payments paid after the due date, accounts pursued by collection agencies, and bankruptcies contribute to credit score reductions.
3. Collateral Loan to Value (CLTV)
Do some research and know the property you intend to purchase. If the property is for sale by owner, look up the county auditor’s website online for the county where the property resides. The county assesses the value of each parcel of land and structure residing on the land for tax purposes. Alternatively, for property listed with a real estate agent, contact the agent or go online to the multiple listing services (MLS) to obtain the list price.
Next, determine the amount of your down payment and subtract it from your anticipated loan amount. Divide this figure by the value of the home; the percentage equals the loan to value. Applicants with percentages less than or equal to 80% tend to receive lower interest rates. Simply stated, financing a home for more than what it is worth, or having a down payment less than 20% of the requested loan amount will cause an increase in the final interest rate you receive.
Obtaining the best mortgage loan is not difficult nor does it require complex mathematical calculations. Be proactive clean up your credit, reduce your debt, estimate in advance how much you want to borrow, and save a down payment.