One of these aspects is found by calculating the debt to income ratio of the client. Basically, the debt to income ratio is a comparison of the applicants net income and his or her monthly debt payouts. The lender does this calculation to make sure they have not overlooked anything and requires income documentation in the form of check stubs and tax returns among other things. The perfect debt ratio is about 1.3; this means that the applicant has 30% more income than debts and expenses to pay every month.
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.).
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.
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 rent to own homes throughout the United States.
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