Learn What Mortgage Lenders Want From Perfect Borrowers
Let us cover the four basic qualities lenders want in a perfect mortgage borrower:
- Stable income
- Attractive credit history
- Low debt-to-income ratio
- Big down-payment.
If a customer is lacking in any one (or more) of these, the borrower will have a difficult time finding a mortgage loan. Let us review each of these four issues.
Stable Income / Employment History
Lenders look for a stable employment history. If you or your spouse have been jumping from job to job within a six month period, it shows unstable or erratic income possibilities. As a rule of thumb, stay with one job for at least six months to a year prior to applying for a loan. Income changes look especially suspicious. If you experience a sudden dramatic increase or decrease in income, be prepared to provide a full verbal or written explanation along with your paperwork.
Start collecting any W-2 or 1099 forms from the last two to three years, as well as your tax returns now.
A credit report gives potential creditors a snapshot of your credit worthiness. It will show what types of credit you currently have and/or what you have had in the past. It also shows whether you have paid your bills on time, filed for bankruptcy, or been evicted from a rental property. It is important to make repairs to your credit history before you apply for a mortgage loan.
Your credit history will impact the interest rate and terms of a loan, the minimum amount of the down payment, and even your likelihood of receiving a loan at all.
This does not apply to you because you know your credit scores, but for the benefit of other readers, get a copy of your credit report from one or all three major credit reporting agencies (Equifax, Experian and TransUnion). Go to AnnualCreditReport.com to get a no-cost, no-gimmick copy of your credit report from each of the three major consumer credit reporting agencies. Review your report and dispute any inaccurate listings.
To find out more about how your credit score is calculated, read the Bills.com resource FICO Score Calculation. This should give you a much clearer understanding of how credit scores work.
Debt to Income Ratio (DTI)
One of the first factors a lender will consider when deciding how large a mortgage loan you qualify for is your debt to income ratio, or DTI. To calculate your DTI, add up your current monthly debt (credit card payments, car loans, etc.) and divide it by your total monthly pre-tax gross income. This ratio is a simple way of showing how much of your income is available to make a mortgage loan payment after all other continuing debt obligations are met.
Lenders often call this the 28/36 qualifying ratio. The first number, 28 percent, indicates the maximum amount of your monthly pre-tax gross income that the lender allows for monthly housing expenses. This amount will include principal and interest of the loan, property taxes, and homeowner’s insurance, or PITI. The second number, 36 percent, refers to the maximum percentage of your monthly pre-tax gross income that the lender allows for all monthly housing expenses plus all recurring debt.
If your ratio numbers are higher than 28/36, you may want to consider reducing debt by paying off credit cards or other loans before starting your home search. When calculating and relying on your DTI to determine loan affordability, be confident with your numbers and do not be afraid to stick with them as you shop around. Some lenders may be willing to loan you amounts that will take you beyond the traditional qualifying ratio — and beyond what you can afford. This could lead to more costly monthly payments and might cause financial hardship if you find that your loan is not affordable once you have moved into your new home.
The down payment is part of the purchase price of a property that the buyer pays, usually in cash, and is not included in the loan amount. Most lenders require five to 20 percent of the purchase price of the home, depending on the type of mortgage loan.
Review your budget and make a decision about how much of a down payment you can reasonably afford to pay. This is not an issue for you, but for the benefit of other readers, if you do not have enough, you may be able to qualify for a loan under various government programs available.
Download a Uniform Residential Loan Application (Form 1003), complete it, and start mortgage shopping. Go to the Bills.com mortgage saving center for no-cost, pre-screened quotes from mortgage lenders.