Loan Approval from Mortgage Financer
From LoveToKnow Mortgage
It is possible to increase your chances for a loan approval from mortgage financer. Ethan Ewing, President of Bills.com, explains what mortgage lenders look for in an application, and how to increase your chances for an approval.
What do lenders examine when looking at an application?
When a loan application goes to underwriting, all loan documents will be verified and reviewed for completeness, accuracy, and legibility. An underwriter will review the application in terms of:
- Collateral: The home and equity
- Capacity: Income and ability to repay
- Character: Past payment history on other loans
- Capital: Other assets
Underwriters will look very critically at the home, specifically its current value and condition, as well as the amount of equity the applicant will have in the home. In looking at the applicant’s current income, they will need to confirm that it is a reliable and steady source of cash flow into the future. Ultimately, the lender must rely on the fact that the potential borrower will be able to maintain a steady income in order to make the monthly payments.
What factors hold more importance than others?
Down payment, credit scores and amount of outstanding debt in relation to income will be the most important factors lenders evaluate in a mortgage loan application.
- Down payment: Homebuyers typically need to put at least 20 percent down on a new-home purchase. Loans with less than that amount entail Private Mortgage Insurance expense.
- Credit scores: Credit scores range from 300 to 850, with higher numbers indicating better credit – or a greater likelihood of repaying debt. The median U.S. credit score is about 725.
- Debt: Paying off existing debt will benefit an application’s credit score tremendously and benefit the debt-to-income ratio at the same time. The amount of debt prospective homebuyers carry affects the three primary variables that determine interest rate on the loans they will receive. These variables are:
- Credit scores
- Loan-to-value: How much of the home's value is being financed by the loan versus paid for in the down payment.
- Debt-to-income ratio: The higher the debt, the more risk, and the less ability to obtain a lower interest rate. If this ratio, including new home payments, is higher than 55 percent, an individual will have a very hard time getting a loan approved. Anything below 35 percent is excellent.
What can people do to increase their chances of getting a loan approval from mortgage financer?
The best thing to do is get a handle on and manage debt prior to shopping for a home and selecting a mortgage lender. Applicants can work to improve their credit scores as well. Significant improvements can be made in relatively little time. Here’s how:
- Monitor: A credit score actually involves three scores from the three major credit reporting agencies – Equifax, Experian and TransUnion. All three are required to provide a credit report. Consumers can access credit reports once each year for free at www.annualcreditreport.com.
- Correct mistakes. If the report shows any inaccuracies, correct them. If you disagree with the results of a credit bureau’s investigation, you can ask the bureau to include a statement of dispute in your file and your future reports.
- Pay bills on time.
- Incur no new debt. Do not open any new accounts for six months ahead of applying for a loan. New inquiries to a credit report can affect the credit score. However, don’t let this discourage you from shopping around for the best loan you can obtain, as the credit bureaus take this into account and will not count multiple inquiries within a short period of time against you.
- Leave room on credit cards. Do not max out accounts or charge up to the credit limit. If possible, keep one or two cards open with low or no balances. This will help the "credit available" aspect of the credit score.
- Do use credit. Don’t try to protect the credit score by not borrowing anything. The credit agencies rely on past payment history to gauge how borrowers will do in the future.
- Do not close a long-standing account with a positive payment history.
Why do different lenders have different mortgage approval standards?
Different lenders have different "appetites" for risk. One lender may be hungry to lend a significant amount of money and thus may aggressively give loans to people who might not be as qualified as others. Another lender, who is not as eager to lend, may be very restrictive about to whom they lend and how much they lend. It mostly has to do with how much money the lending institution is looking to lend, its threshold for risk and its expected return on the loan.
What makes an application subprime?
A subprime loan is a loan that is given to people with a credit record that does not qualify for a loan at prime, or the best, interest rates. These individuals do not meet prime standards to an extent that puts the loans into the riskiest category of consumer loans. Although there is no single, standard definition, a credit score of about 680 is generally considered prime and a bit below is generally considered "Alt-A." A score below 660 usually results in a borrower being charged a higher interest rate or denied credit altogether.
What factors usually guarantee an application denial?
Some factors exist that are not necessarily guarantees of denial, but that serve as red flags for lenders. They raise alarm bells and may cause some people to get turned down for a mortgage.
- Credit scores under 660-680
- Debt-to-income ratio higher than 55 percent
- Past bankruptcy judgment
- History of late payments
- High credit card balances
- Any liens placed against the prospective buyer
How far in advance should people start preparing to apply for a mortgage?
Individuals should be checking credit scores at least once a year, if not more frequently, whether they are considering a home purchase or not. To determine if a score needs more work, it is advisable to check the score several months before starting the loan application process. How far in advance people should start saving for a down payment depends on their income, spending, short- and long-term financial goals, and savings.
Prospective homebuyers will want to factor in the full costs of buying as they save toward a home purchase. The down payment and principal and interest on a mortgage payment are only the beginning of home-related costs. Prospective buyers also can determine the property tax amount – the largest part of the escrow payment – by checking with their real estate agent or the county property tax assessor before buying.
Homebuyers also should make sure to not deplete savings or cash on hand when making a down payment, since new home owners often must complete initial work on the home, such as painting, flooring, landscaping or bringing an older house up to date.
What documentation will applicants need to provide to lenders along with their applications to get loan approval from mortgage financer?
Applicants will need pay stubs, copies of W2 statements (or other income statements – such as tax returns if self-employed), an appraisal and a list of assets. The lender often will coordinate and schedule the appraisal, and will pull the credit report.
About Ethan Ewing
Ethan Ewing has served as president of Bills.com since joining the firm in 2006. Before that time, he was the vice president of business development for MetaReward, an Experian® company.
In the mortgage industry, Ewing served as a mortgage project planner for iOwn.com (San Francisco); business and sales manager, and due diligence officer, for Empire Mortgage (Hunt Valley, Md.); and as a mortgage loan officer for Eastern Savings Bank (Hunt Valley).
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This page has been accessed 268 times. This page was last modified 20:22, 12 August 2009.
© 2006-2009 LoveToKnow Corp.
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