March 25th, 2018 7:58 AM by Jackie A. Graves, President
basic truth: A mortgage loan holds your house and land as collateral. But in
most cases, a lender does not really want to end up with your house. They want
you to succeed and make those monthly payments that make the world (or at least
the U.S. world) go ’round. So when you apply for a loan, the lender will
scrutinize your financial situation to make sure you are worth the risk. Here’s
a look at what they will consider before qualifying you for a mortgage.
lenders like a down payment that is 20 percent of the value of the home.
However, there are many types of mortgages that require less. Beware, though:
If you are putting less down, your lender will scrutinize you even more. Why?
Because the less you have invested in the home, the less you have to lose by
just walking away from the loan. If you cannot put 20 percent down, your lender
will require private mortgage insurance (PMI) for most loan types to protect
himself from losses. (However, there are some loan types available that do
not require PMI, such as VA loans).
look at the Loan to Value Ratio (LTV) when underwriting the loan.
Divide your loan amount by the home’s appraised value to come up with the LTV.
For example, if your loan is $70,000, and the home you are buying is appraised
at $100,000, your LTV is 70%. The 30 percent down payment makes that a fairly
low LTV. But even if your LTV is 95 percent you can still get a loan, most
likely for a higher interest rate.
There are two debt-to-income ratios that you need to consider.
First, look at your housing ratio (sometimes called the “front-end ratio”);
this is your anticipated monthly house payment plus other costs of home
ownership (e.g., condo fees, etc.). Divide that amount by your gross monthly
income. That gives you one part of what you need. The other is the debt ratio
(or “back-end ratio”). Take all your monthly installment or revolving debt
(e.g., credit cards, student loans, alimony, child support) in addition to your
housing expenses. Divide that by your gross income as well. Now you have your
debt ratios: Generally, it should be no more than 28 percent of your gross monthly
income for the front ratio, and 36 percent for the back, but the guidelines
vary widely. A high income borrower might be able to have ratios closer to 40
percent and 50 percent.
A lender will run a credit report on you; this record of your
credit history will result in a score. Your lender will probably look at three
credit scoring models, they will use the median score of the three for
qualifying purposes. The higher the score, the better the chance the borrower
will pay off the loan. What’s a good score? Well, FICO (acronym for Fair Isaac
Corporation, the company that invented the model) is usually the standard;
scores range from 350-850. FICO’s median score is 723, and 680 and over is
generally the minimum score for getting “A” credit loans. Lenders treat the
scores in different ways, but in general the higher the score, the better
interest rate you’ll be offered
The days when a lender would sit down with you to go over your
loan are over. Today you can find out if you qualify for a loan quickly via an
automated underwriting system, a software program that looks at things like
your credit score and debt ratios. Most lenders use an AUS to pre-approve a
borrower. You still need to provide some information, but the system takes your
word for most of it. Later on, you’ll have to provide more proof that what you
gave the AUS is correct.
To see if you’d qualify for a mortgage, you can talk
to a local lender, submit an anonymous loan request on Zillow, or
use our Affordability
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