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.
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.
There is other information that lenders want that is not included on a credit report. Having an understanding of an applicants other financial holdings helps them know whether or not there are means to make an equity investment, or down payment. Also, semi-liquid assets like retirement accounts or large stock portfolios can soothe over not so perfect debt ratios. Most mortgage lenders like to see that an applicant has additional assets that make it possible to make mortgage payments out of regular income. Since this information is not available as part of a credit report, applicants should be prepared to provide this information to a lender.
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.
