While most people know that a good credit rating is an important part of being approved for a mortgage loan there are other things that a lender looks at when making the loan decision. When deciding whether or not to approve a mortgage the lender looks at several elements; the credit report is only part of the data they review. For this reason mortgage applicants are required to furnish information that a lender cannot obtain by themselves.
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.
Another important factor that mortgage lenders look at is the applicants payment history, specifically looking for late payments. Mortgage lenders consider the timeliness of payments to be extremely important. This information is found in the credit report, but is given a different weight in the FICO score than the weight that the mortgage lender gives it. For this reason, the lender will review the applicants credit report in detail, beyond just the overall score, looking to see whether or not the applicant has a habit of making his payments on time. If the client has a number of late payments in his credit report, this is one instance where a letter of explanation appended to the loan application might be helpful in explaining the problem.
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 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.
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.
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.
Another important factor that mortgage lenders look at is the applicants payment history, specifically looking for late payments. Mortgage lenders consider the timeliness of payments to be extremely important. This information is found in the credit report, but is given a different weight in the FICO score than the weight that the mortgage lender gives it. For this reason, the lender will review the applicants credit report in detail, beyond just the overall score, looking to see whether or not the applicant has a habit of making his payments on time. If the client has a number of late payments in his credit report, this is one instance where a letter of explanation appended to the loan application might be helpful in explaining the problem.
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 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.
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.
About the Author:
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.
