Most people realize that having good credit scores is vital for getting a mortgage loan approved, but this is not everything that the lender takes into consideration. There are several key factors that a mortgage lender looks at when determining whether or not to approve a loan and only part of this information is contained in a credit report. This is why most people applying for a mortgage are required to present much more documentation than the lender can obtain independently.
One of these key factors is the applicants debt ratio. This is the ratio of an individuals debt and expenses to his net income. The lender compares the potential borrowers current debt load and living expenses with his income. This is why applicants are expected to provide pay check stubs, tax returns, and other documents that cannot be obtained from the credit reporting agencies. The ideal debt ratio is about 1.3, meaning that the applicant has about 30% more income than is required to pay for his current debt 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.
Mortgage lenders also look at the applicants other assets besides his regular income to determine if the applicant has the means of making an equity investment, or down payment. If the client has large additional assets and they are fairly liquid ” like a large stock portfolio ” this may help offset other factors, such as a less than optimal debt ratio. If the applicant has enough additional assets to make mortgage payments outside of his regular income, this is viewed favorably by most lenders. This information is usually not included in a credit report and is why a mortgage lender will ask for statements from the applicants brokerage accounts and retirement accounts (IRAs, 401(k), etc.).
There is one important element of loan approval has nothing to do with the applicants credit score or overall financial status. This factor is the property being mortgaged. Every lender will want to see an appraisal of the property that their client wants to purchase. This ensures that the lender will not loan more than the property is worth. The resell value of every property must be enough to cover the original amount of the loan in case of foreclosure.
This guideline can help a potential homebuyer in examining his own credit and make adjustments before applying for a loan. Having everything in order can streamline the process and be advantageous when the application is reviewed.
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 secret please visit them on the web. Finance the Dream offers rent to own homes throughout the United States.