Everyone knows that in order to be given a loan, especially a mortgage, that a good credit rating is vital. However, this is just the beginning of what a lender considers when reviewing an application. The lender looks at several different aspects of a persons financial health to gain an understanding of their situation. Much of this information is not found on a credit report. Since lenders generally cannot obtain this information themselves they require the applicant to bring in the documentation they need.
One of these important elements is the debt to income ratio. The ratio is a look at the applicants monthly debt and expenses as a function of net income. Comparing current debt load with income gives a lender a good idea how much more debt can be handled. For this purpose applicants will need to bring in tax returns and check stubs and any other financial documentation to substantiate statements of income. Ideally, an applicants debt ratio would be about 1.3, in other words there is 30% more income than the applicant needs to pay his monthly debts and expenses.
An applicants payment history is also a key element of the application, lenders look very specifically for late payments. Lenders view a habit of making on-time payments very favorably. While payment history information is part of the credit report, a mortgage lender weights this information differently than the credit bureau reporting FICO scores. Because of this mortgage lenders study the applicants credit report to find all the information possible about an applicants payment habits. If there are habitually late payments showing on a credit report it is a good idea to attach a letter of explanation to the loan application.
There is other information that lenders want that is not included on a credit report. Having an understanding of an applicants other financial holdings helps them know whether or not there are means to make an equity investment, or down payment. Also, semi-liquid assets like retirement accounts or large stock portfolios can soothe over not so perfect debt ratios. Most mortgage lenders like to see that an applicant has additional assets that make it possible to make mortgage payments out of regular income. Since this information is not available as part of a credit report, applicants should be prepared to provide this information to a lender.
Another factor that lenders take into account has nothing to do with the applicants financial position, but deals with the property in question. All mortgage lenders will require a comprehensive appraisal of the property that the applicant is seeking to purchase. This prevents the lender from lending out more money than the property is worth. Should the loan turn bad and result in foreclosure, it is crucial to the lender that the resell value of the property be enough to cover the amount originally lent out.
Knowing what the mortgage lender looks for can help the potential home buyer get their application in good form. The above can help the potential mortgage seeker determine what elements of his financial position should be changed or corrected to make approval more likely.
Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on credit repair please visit them on the web. Finance the Dream offers rent to own homes throughout the United States.