Make Yourself More Attractive to a Lender
Thinking about applying for a loan? Here are a few facts to consider before you get started.
Debt-to-Income Ratio
Before you apply for a loan, you should take a look at your debt-to-income ratio. A common rule of thumb when shopping for a mortgage is that your debt-to-income ratio should be no higher than 36 percent. Lenders also like the total of your housing expenses alone to not exceed 28 percent of your monthly gross income.
When lenders calculate the rate of interest at which you can borrow, they take into account the amount of debt you are currently carrying and your ability to repay it. The great your debt load, the greater the risk you will default on your payments and thus, the higher interest rate the lender will charge in order to offset their risks. Pay off some of your debt – particularly high-interest debts such as credit card balances – and you may qualify for a lower interest rate.
When lenders look at how much you can borrow, they look at the amount of debt you have outstanding now and how much more you can afford, given your current income. If you have a big mortgage or a lot of credit card debt and pay high monthly installments, lenders will be wary of allowing you to borrow more money. Pay down your debts and free up some cash and you may be able to qualify for more credit.
Credit
Credit ratings are used to evaluate your creditworthiness. Generally, lenders look at the amount of debt you carry, your ability to repay it and your payment history. If you have a history of late payments or more serious problems such as a court judgment against you or a personal bankruptcy, a lender may consider you to have a very high risk of default and may choose not to lend you money.
But in the case of a mortgage, don’t just assume you won’t be able to qualify for because you have a low credit score. If your score puts you in the category of a “risky borrower,” you may be required to pay for mortgage insurance. You may also incur a higher interest rate. But once you’ve paid your mortgage down for a year or two, and you improve your credit score, you should be able to cancel the insurance and renegotiate the loan at a better rate.
Down Payment
In most cases, lenders no longer expect all buyers to have a down payment of 20 percent in order to qualify for a mortgage. According to the National Association of REALTORS®, today most first-time home buyers put 10% or less down on their homes. There are also government-backed down-payment assistance programs available to help you if you’re having trouble coming up with sufficient funds.
Loan-to-Value
Loan-to-Value (LTV) is a mathematical equation used to show the amount of a first mortgage as a percentage of the total appraised value of a home. The percentage is usually called the loan-to-value ratio. For instance, an appraised property value of $150,000 and a first mortgage of $100,000 produce an LTV ratio of 66 percent. The higher the percentage, the less equity is available in the home.
The loan-to-value is one of the biggest factors a lender takes into consideration when qualifying a consumer for a mortgage. The risk of a borrower defaulting on a loan is a big concern for a lender, and the higher the loan-to-value, the higher the risk to the lender.
When a loan has a low loan-to-value ratio – below 80 percent – it usually has a lower interest rate, if the borrower is low-risk in other ways (such as having a good credit score and low debt-to-income ratio). In cases where the borrower may have other problems, such as a lower credit score or previous late payments, a low loan-to-value ratio may allow the lender to still extend a loan offer, since the higher equity offsets the lender’s risk.
In most cases, loans based on a higher loan-to-value are reserved for consumers with higher credit scores and a good mortgage payment history. 100 percent financing – loans with a 100 percent loan-to-value ration – are only extended to those with the best credit.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. We encourage and support an affirmative advertising and marketing program in which there are no barriers to obtaining housing because of race, color, religion, sex, handicap, familial status, or national origin.
REALTOR® -- A registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.
Get Started Now!
- Check Your Credit Report & Credit Score now!
- Start a Loan Request
- Sign up for our News Feeds
- Have Questions? Call 1-800-GET-SMART (1-800-438-7627)
