August 15th, 2018 2:41 PM by Jackie A. Graves, President
a look at what they expect from potential borrowers.
qualify you for the best rate, lenders will see if you pass muster in three
main areas. Note that you may be able to offset weakness in one category with
strength in another.
Are you a good credit
One of the first things lenders do is pull your credit score. The most common
is the FICO score, which will be based on data from one of the three major
credit bureaus (Equifax, Experian and TransUnion). Lenders use the lower of two
scores, the middle of three or the average of all scores. If you have a co-borrower,
they compare your scores and use the lower of the two or average them. Your
debt-to-income ratio and your down payment determine the minimum required
credit score for a mortgage.
Can you handle the
To measure “capacity,” lenders scrutinize your (and your spouse’s) job and
income history and prospects, debt-to-income ratios, and savings and assets.
Lenders will also look at your proposed ratio of monthly housing expenses to
income. Housing expenses include loan principal and interest, real estate
taxes, and hazard insurance (PITI), plus mortgage insurance and
homeowners-association dues. Housing expenses generally shouldn’t exceed 25% to
28% of your gross monthly income.
also figure your maximum debt-to-income ratio (total monthly debt payments
divided by gross monthly income). That number and your down payment determine
the minimum required credit score; if it’s 36% or less, Fannie Mae sets a
minimum credit score of 620 with a down payment of 25% or more, and 680 with
less than 25% down. To push the debt-to-income ratio to 45%, you’ll need a
credit score of at least 640 with a down payment of 25% or more, and 700 with
less than 25% down. Standards get tougher as you layer on more risk—say, with
an adjustable-rate mortgage or investment property.
Does the value of the
home justify the loan you want? “Collateral” is typically measured as
loan-to-value ratio: the amount of the loan divided by the appraised value of
the home you want to finance. If you could borrow all of the money, the LTV
ratio would be 100%. But lenders will demand a down payment of at least 3%.
That way, you have a stake that you stand to lose if you default on your loan.
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