Trying to purchase a home is a lot of work and worry. You look forward to when you can pop the cork and celebrate your new home with Paso Robles wines. But before that, here is what you need to know.
A mortgage loan is a type of loan that is typically used to purchase a home or other real estate property. When seeking a mortgage loan, a lender will evaluate several factors to determine the borrower’s creditworthiness and the risk involved in lending them the money. In this article, we will discuss what lenders look for when seeking a mortgage loan.
Credit Score
The first thing a lender will consider when evaluating a mortgage loan application is the borrower’s credit score. A credit score is a number that represents a borrower’s creditworthiness and ability to repay debt. A higher credit score indicates that the borrower is more likely to make payments on time and repay the loan in full.
Most lenders use the FICO score, which ranges from 300 to 850. A score of 700 or above is generally considered good, while a score below 620 is considered poor. The higher the credit score, the more likely the borrower is to receive a lower interest rate on the mortgage loan.
To improve their credit score, borrowers can pay bills on time, keep credit card balances low, and avoid opening too many new credit accounts at once. It’s also important to check for errors on credit reports and dispute any inaccuracies.
Income and Employment
Lenders will also consider the borrower’s income and employment history when evaluating a mortgage loan application. The lender will want to see that the borrower has a stable source of income and a history of consistent employment. The lender will typically ask for several months of pay stubs, W-2 forms, and tax returns to verify the borrower’s income.
Lenders will also consider the borrower’s debt-to-income ratio (DTI), which is the amount of debt the borrower has compared to their income. A high DTI ratio indicates that the borrower may have difficulty repaying the loan. Generally, lenders prefer a DTI ratio of 43% or lower.
Down Payment
Another factor that lenders consider when evaluating a mortgage loan application is the down payment. A down payment is the amount of money the borrower puts down on the property. A larger down payment indicates that the borrower is less risky to lend to because they have more equity in the property.
Most lenders require a down payment of at least 3% to 20% of the home’s purchase price. Borrowers who put down less than 20% will typically be required to pay private mortgage insurance (PMI), which is an additional monthly cost. Borrowers who can put down a larger down payment may be able to secure a lower interest rate on the mortgage loan.
Property Value
Lenders will also consider the value of the property when evaluating a mortgage loan application. The lender will want to make sure that the property is worth the amount that the borrower is asking to borrow. The lender will typically order an appraisal of the property to determine its value.
If the property’s appraised value is lower than the amount the borrower is asking to borrow, the lender may require the borrower to make a larger down payment or may reject the loan application altogether. The lender may also require the borrower to purchase additional insurance, such as flood insurance if the property is located in a high-risk area.
Assets and Liabilities
Lenders will also consider the borrower’s assets and liabilities when evaluating a mortgage loan application. The lender will want to see that the borrower has enough money in savings to cover unexpected expenses and that they do not have too much debt.
Lenders will typically ask for bank statements and information about other assets, such as retirement accounts and investments. They will also look at the borrower’s liabilities, such as credit card debt, car loans, and student loans.
Lenders will consider the borrower’s debt-to-income ratio (DTI), which is the amount of debt the borrower has compared to their income. Lenders use this to evaluate a borrower’s ability to manage debt and make payments on a mortgage loan. It is calculated by dividing the borrower’s total monthly debt payments by their gross monthly income.
Lenders typically prefer a DTI ratio of 43% or lower, which means that the borrower’s monthly debt payments should not exceed 43% of their gross monthly income. A high DTI ratio indicates that the borrower may have difficulty repaying the loan, and the lender may require a larger down payment or reject the loan application altogether.
It’s good to know the facts before you see a lender. You will be able to discuss your loan with the lender and understand what they require. This can make the whole process easier.
