The mortgage process can be a bit mystifying for borrowers when they undertake it for the first time. There are a lot of factors a lender considers, as shown here.
Many first time homebuyers make incorrect assumptions about the mortgage process. They tend to get stressed out about things such as credit scores without understanding how they are really used. For instance, less than stellar credit can be offset by making a higher down payment. Make a sufficiently sizable down payment and a lender will overlook practically anything! Regardless, here are some of the factors considered by lenders in evaluating your loan application.
1. Stability – Stability can also be called history. A lender wants to see a history of employment and income. Lenders get nervous if you have only been employed for six months and have just recently started making enough income to support the loan. They worry because it is no sure thing you will have the same job next year. If you do not, you may be unable to make the loan payments.
2. Debt Income Ratio – Lenders get nervous when they see a lot of debt compared to the amount of income you bring in each month. If your debt obligations are high without the mortgage, how can you be expected to make the monthly payments on the home? You can’t. Whenever possible, try to pay down credit cards and such before you apply for a loan. The lower you debt to income ration, the better a lender will feel about your application.
3. Appraised Values – Many homebuyers are surprised to learn the value of a property is not the agreed purchase price. Instead, lenders look at the appraised value. This may seem backwards, but the appraised value gives the lender a more objective look at the situation. Just because you paid too much for the property does not mean the lender wants to share in the risk.
4. LTV – The loan to value ratio is a way of determining risk for lenders. The LTV is arrived at by dividing the appraised value of the home by the amount you are asking for in a loan. Put in simple terms, it represents the amount of money you are willing to put down on the house. When in doubt, put down as much as you can. The more you do, the more small problems the lender will be willing to overlook.
5. Cash – Even lenders love hard, cold cash. In this case, the lender wants to see how much money you have stuffed away in the rainy day fund. In theory, the lender believes you will use it to meet month mortgage payment when things go bad. The more you have set aside, the more comfortable a lender is.
6. Credit Scores – Your credit score is a calculation of your debts, payment history and so on. It is often focused on as the key to getting a mortgage. Yes, it matters, but not as much as many think. If you have problems with your credit, you can offset them by offering a higher down payment. If you down payment exceeds 25 percent of the appraised value, a lender will overlook practically anything on your credit except tax liens and outstanding judgments.
The simple fact of the matter is that there are a lot of factors that go into evaluating a loan application. You can tweak certain aspects to make up for weaker ones.
Sergio Haros is with Great Western Mortgage - specializing in California bad credit mortgage loans.