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 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.
Payment history is another important aspect of an applicants financial picture; lenders look for late payments on credit reports. On-time payments are very important to mortgage lenders. Payment history information is part of a credit report but lenders look closely because as part of the FICO score it is weighted differently than mortgage lenders weigh it. An applicants credit file is scrutinized closely to find out all there is to know about his or her payment habits. This goes far beyond looking at the credit score. Attaching a letter of explanation to a mortgage application would be helpful to a lender who is going to see several late payments.
Besides regular income, mortgage lenders also want information about other assets and holdings the applicant owns. This helps them decide whether their client has the ability to make an equity investment, or down payment. Semi-liquid assets like retirement plans and stock portfolios help to mitigate less than perfect debt ratios. Mortgage lenders feel more comfortable with applicants who have enough additional assets that paying a mortgage out of regular income will not be a problem. Again, this information is not part of a credit report so providing this sort of data with a mortgage application is important.
There is one key factor in the application that the client really has no control over: the property itself. A comprehensive appraisal of the property is always required before a loan is approved. This requirement keeps lenders from loaning out more than the property is valued at the time of purchase. The lender is covered if the loan must be foreclosed or goes bad in some other way; the resell value of the property will be at least enough to cover the original loan note.
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 please visit them on the web. Finance the Dream offers lease options throughout the United States.
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