What Lenders Look for
Before lenders lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.
While some lenders require no reserves at all, having them available will strengthen your loan application. Reserves can be money that is held in a checking or savings account, certificate of deposit, 401k or stocks and bonds. You will not need to access these funds, just verify that they are there.
Sub-prime lenders understand you may have come upon some hard times in the past and will look at your more recent credit history.
Lenders look at the risk that you will default on the loan, based on several factors. Those include credit score, history of paying your mortgage or rent on time, debt-to-income ratio, occupancy type (primary residence, second home or investment property), property type (single-family, 2-unit, condo), percentage of the property's value you want to borrow (60%, 70% 80% 100%), and work history, among others.
Lenders will look at an applicant's past credit history, income and the value of collateral being used to secure the mortgage. The lenders will compare this information to their guidelines to determine if the applicant is a good credit risk.
With regards to repayment capability, most banks prefer that a borrower has total debt obligations of less than 45% of gross income. Total debt include any monthly obligations the borrower has, including the proposed mortgage payment, property tax, homeowner insurance, automobile financing, credit card installments, alimony, etc. Utility and food costs are not considered debts and are not included in the Debt-to-Income ratio. Some non-prime mortgage lenders allow a Debt-to-Income ratio of up to 55%.
Lenders will look for job stability, credit worthiness, disposable income, liquid assets, debt to income ratios and loan to value ratios among many other things. Sometimes a borrower can be deficient or weak in one of the above mentioned areas but make up for it in others to still be considered for the financing desired. Lenders don't typically want to see a lot of job changing or career changing happening. Also, obviously the better the credit the better the chance the lender will be repaid on the debt. Disposable income is how much income is left over after you have paid all of your monthly obligations. Debt to income is a ratio that is calculated based off of how much you make divided by how much your obligations are and LTV (loan to value is simply how much of a mortgage you are borrowing compared to how much your home is valued at. These are all very important items that a lender looks at as a part of your whole package.
Loan to value ratio, or LTV and your credit rating are tied together to represent the maximum loan you will be able to obtain.
LTV is the ratio between what you owe on your house and what it's worth. If your house is worth $100,000 and you still owe $80,000, your loan-to-value ratio is 80 percent, because $80,000 is 80 percent of $100,000. When you bought the house, calculating the LTV was straightforward: the mortgage amount divided by the home's price.
If you wanted to take out the 20% equity in your home from the example above you would have to have the credit scores to qualify. Most lenders will not allow a borrower to go to 100% without a mid score of 580.
Reserves is another factor that lenders want to see. Reserves are simply how much liquid cash you have in the bank to make payments with. If you are a first time home buyer the reserves can be anywhere from 2 -6 months worth of PITI (Principle, Interest, Taxes and Insurance). Various lenders will have different guidelines so be sure to ask your Mortgage Professional how much cash you will need to have in reserves.
Your credit worthiness will affect the interest rate and the number of programs that are available to you.
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Information listed above is to be used for educational purposes only and is not guaranteed