Lenders generally base mortgage decisions on
five factors - income stability, debt-to-income ratio,
loan-to-value (LTV), property appraisal, and credit history.
Knowing what to expect and anticipating potential obstacles
before you apply can help you can boost your borrowing power.
But if your individual situation is different from the standard
ratios outlined below, don't despair! There are programs that
accommodate many financial situations.
Income stability
Any income that can be verified and has a 2-year history such as
investment interest, commissions, royalties, social security,
disability and alimony payments, in addition to your salary,
counts to your advantage.
If your credit and assets are a little shaky,
a lender may be more accommodating if someone with an
established credit history co-signs your loan.
Debt-to-income ratio
Lenders prefer that the proportion of your combined debt and
housing expense be no more than 36% (28% for housing and 8% for
debt) of your monthly pre-tax income.
Do an inventory of your current debts. It's a
good idea to reduce your debt before applying. Being
overextended may work against you. Make do with your car a few
more years. Consolidate outstanding balances at a lower interest
rate. Take the time you need now to pay down your debt.
Loan-to-value
Loan-to-value (LTV) is the ratio of your loan amount to the
value of your property. This ratio tells a lender how much
equity you will have in your home. The higher your equity and
the lower your LTV, the larger your stake in the investment and
the less risk there is for the lender. A LTV of 80%, for
example, means that you are putting 20% down and borrowing 80%
of the property's value.
Borrowers with less than 20% equity are
generally required to buy private mortgage insurance (PMI),
which protects the lender in case of a loan default.
Loan-to-value guidelines are determined by the borrower's
circumstances and the type of loan.
Property appraisal
This is a professional assessment of your property by a licensed
appraiser to make sure that its market value is sufficient for
the loan amount. A lender needs to know that the borrower's
collateral (property and down payment) will cover the loan
amount in case of default.
Credit history
Naturally a lender wants to know your payment habits before
giving you a large sum of money. It's a good idea to check your
credit report before you begin the process in order to correct
any errors.
Order your credit report for a fee directly
from Equifax.com.
