What A Lender Looks at

When you're in the market to buy a home having a clear picture of your finances your first step. If this is also your very first home, the endless list of things to consider is overwhelming. But one of the most important things to keep in the front of your mind is that mortgage lenders are quietly looking at your finances to decide if they should loan to you, and how much. 

So slow your roll visiting open houses and checking out neighborhoods; have your finances in check before you do any of this. Knowing your buying power isn't all that exciting, but knowing how these numbers impact your chances of getting a loan are vital to your success. 

Here are the 4 numbers lenders are carefully looking over:

1. Credit score 

A credit score is the most simple way a lender can see how diligent you are with paying your debts on time. There are five factors that determine this score, and they are weighted differently. The first, and most important factor is your payment history (35%), debts owed (30%), length of credit history (15%), credit mix and new credit (10% each). 

A credit score of 620 isn’t great, but it’s not awful. Now having a score in this ballpark won’t deny your chances to get a loan, but it will determine what kind of loan you get. With a lower credit score, you’ll get a higher interest rate, and just the opposite, a higher credit score gets a lower interest rate. 

2. Down Payment

Despite credit scores being the most heavily weighted factor, cash still reigns as king. The bigger down payment you throw down on the table, the more buying power you have. 

And generally, we all know the 20% down rule, it gives the buyer great benefits over not having a full 20%. One major one is sometimes you don’t need private mortgage insurance with 20% down. When sellers see a potential buyer throw down 20% down payment, they know the buyer is beyond serious, and they instantly jump to the top of the line in the seller’s eye.

3.Debt-to-income ratio

Having a strong, steady income is awesome, but the loan won’t be yours if that is all you have to show. A lender will want to know you can pay the massive debt you are about to undertake, whilst being able to pay your other debts. To determine this a lender will look at your front-end ratio, aka your monthly housing payment, which is your current insurance, PMI, interest, taxes, and divide it by your monthly income. The magic number is anything below 28%. 

Next, your back-end ratio is carefully reviewed. This is how much of your monthly pay goes towards your other existing debts like credit cards, student loans, car loans, etc. The magic number here is anything below 36%. 

Having any numbers above the magic number still won’t deny you a loan, but it will make your loan terms a bit more difficult.

4. Assets

What a lender stresses about most is the borrower’s ability to repay the loan when they are hit with a crisis. A lender worries about if the borrowers income will continue to flow, and how well they can keep paying their debts during a financial storm. 

To help ease their worries, lenders will want to see what assets you own. The documents claiming which assets you own tells them what they could potentially collect if a true disaster was to take place. It essentially is your cushion. The more padding your cushion has, the bigger mortgage a lender is willing to give you, because you can probably afford it. 

Having a strong grasp of how these four numbers impact your ability to get a mortgage before you start looking for houses will pay off in the long-run. Your bank account will thank you when it’s ready to finally buy that house.

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