A lender considers many factors before they will approve a mortgage for a homebuyer. Loan underwriting is the process of assessing your credit worthiness and every loan must go through this process. Maintaining your credit and paying your bills on time, can go a long way toward approval of a home loan. Your lender will look for several other factors but if you are aware of them, you can go to your lender with the assurance that you are a good risk for a home mortgage.
What is your Credit History?
Your credit history can give a lender a good picture regarding your honesty and ability to repay your debt. The lender will consider if you have used credit before, your address and length of time living there, as well as previous addresses, whether or not you pay your bills on time and how long you have been working at your current job.
If a lender finds any negative information in your credit report, it may affect your ability to buy a home. You may still be able to buy a home if you have negative information on your credit report or less than stellar credit. There are many programs for buyers with credit issues but many of these loans will cost you more over their term due to private mortgage insurance and/or higher interest rates than a buyer with good credit.
If you are considering buying a home in the future, get you credit and bills in order to get the best deal on a loan. How you handle your money now can equate to big savings when you get ready to buy a home.
Do you have the Capacity to Repay?
The lender will also consider your capacity to repay your debt. They will consider your debt ratio, which shows qualifying monthly housing expense as a monthly debt payment -to-income ratio or expense of income ratio. It is expressed as a percentage or decimal and can be interpreted in the proportion of your assets financed by debt. Lenders want to know that you earn more than you owe, as it is a good indicator that you are responsible for with income and how you use it.
They will look at your income and whether you are salaried, or self-employed, the amount of money that you have in cash reserves, the number of borrowers on the loan, and the characteristics of the loan for which you have applied. Whether it a 15, 20, and 30-year fixed rate mortgage or an adjustable rate mortgage and the purpose of the loan are also factors when loan underwriting is considering a mortgage for you.
All of these factors are considered by the lender along with any capital that you may have. This can include stocks, bonds, 401k, automobiles or other valuables. Savings and investments represent assets that can be used to help pay the loan, if necessary, or to use in the event of a layoff or illness. Savings and investments are also indicators to the loan underwriting department for your lender that you are a good risk for a home mortgage.
Are you of Good Character?
Your credit reports from the three major credit bureaus tell the story of your credit history and are an indication of your character. If you are the type of person who pays on time and maintains low credit balances you will have less trouble obtaining a loan than someone with a history of late payments and defaulted loans because the loan underwriter will deem that you are of good character and trustworthy. Being responsible for loans of the past make you a better risk, now and in the future for the lender and a loan underwriter will look at you favorably.
On the other hand, you cannot have a credit history until you have credit. For those who have never borrowed any money, the applying for a small loan through your bank, a local store or any other lender that reports to the credit bureau can help you build your credit and apply for a home loan if you meet the income levels required for the home in which you are interested.
A credit report with negative information can affect your ability to buy a home, a car or to get an apartment to rent. Taking care of your bills by paying them on time and managing your money wisely will get you past the loan underwriter requirements and get you into a home.
Are you Ready to Buy a Home?
Knowing The Three Cs of loan underwriting help, you know what is required of you when you apply for a home mortgage. Loans are more difficult to get today than they have been in the past and excellent credit, the capacity to repay and your character mean more than ever when you apply for a loan.
Although, there are still low down payment loans and programs for those whose credit is less than stellar, in order to get the best rates and terms, you need to see to it that your affairs are in order before applying for a mortgage. The diligence you show will mean thousands of savings for you over the life of a home mortgage.
2 Point Highlight
A lender considers many factors before they will approve a mortgage for a homebuyer.
Maintaining your credit and paying your bills on time can go a long way toward approval of a home loan.
