What Goes Into a Loan Approval
Ever wonder what goes into a loan approval? Every lender is different, but almost all of them look at the following factors when reviewing a loan application.
How much cash you have for a down payment.
A down payment is the amount of cash you plan to pay upfront, and it is calculated as a percentage of the purchase price of the property. Lenders generally like to see at least a 10 percent down payment, although 20 percent or more is ideal. There are loans available with less than 10 percent down, but – because they are riskier loans for the lender - they can be more difficult to get approved for and often come with a higher interest rate.
How much debt you have as a percentage of your income.
This ratio is calculated by taking all your monthly debt - including car loans, minimum credit card payments, installment or student loans, any child support or alimony – and adding to that your expected mortgage payment, plus taxes and insurance. This total debt load is then divided by your gross monthly income (before taxes and withholdings are taken out) to calculate what is known as your debt-to-income ratio. Lenders like that number to be 36 percent or less, and housing expenses alone should not exceed 28 percent.
How thoroughly you can document income and assets.
Lenders generally want to see proof of your income and assets before they approve you for a loan. These are usually in the form of W-2s and bank statements. If you are self-employed, many lenders want to see at least two years of tax returns.
How high your credit score is.
All the factors above being equal, the higher your credit the better rate you’ll qualify for. If your score is above 760, you’ll generally pay less in interest than if you had a lower score. If your score is below 660, you may want to improve your credit before applying for a mortgage. You can get a free credit report from www.annualcreditreport.com. Keep in mind, however, that the report does not include the actual score, so it’s worth it to pay the small fee to get this important number. For more information, see our article: Understanding Your Credit Score.
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