Lender Considerations

What does the lender consider when you apply for a Mortgage

Income

How does the lender determine your ability to pay the mortgage? 

Lenders need to "document" your income through pay stubs and W-2 forms. If you have a job with substantial bonus or commission income, they may need to see your income tax statements or obtain written and/or verbal verification of this income from your employer. If you receive or pay out child support or alimony, they'll need to see your divorce decree. When receiving child support or alimony, that information is optional to disclose. Self-employed applicants will have to supply additional documentation to demonstrate the profitability of the business you own. 

These documents will assure the lender that you have the ability to make your PITI monthly payments (consisting of principal, interest, taxes and insurance) as well as meet your other financial obligations. 

They'll also look at your income source(s) and employment history. A lender needs to be reasonably certain that your employment will continue, and periods of unemployment or frequent job changes will require logical explanations. 

Credit History

How does the lender determine your willingness to pay the mortgage? 

Every lender will need to "measure" your willingness to pay your mortgage by looking at how you've paid your rent, your car loan and other debts in the past. 

If these bills were paid regularly and on time, they will have confidence that you'll pay your mortgage on time too. Your payment history is recorded by a credit bureau on a credit report, which your lender will order for you when you make your mortgage application. Your credit report does not have to be perfect, but it does have to present the picture of a responsible individual who takes his or her obligations seriously. If your credit report shows some delinquencies, your lender may ask you to explain these in writing. 

Some people have little or none of the type of credit that shows up on a credit report. When an individual has no credit, there's no way for a lender to tell if you'll be a reliable mortgagor. In many cases, however, they can help you build a credit history by documenting your payments to the telephone, gas, and electric company, as well as to your landlord. 

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Assets

How does the lender determine your ability to close the transaction and maintain your future obligations? 

You may need a certain amount of cash to purchase a home. Depending upon the loan product, your cash can come from several sources: your own savings, a gift from a relative, a sales concession from the seller, a grant from a community agency or employer, or from the lender. The source of this money must be carefully documented through bank statements indicating that the funds do, in fact, exist, and through gift letters. 

The exact amount of the funds you need will be determined by your loan amount and program, the location of the property, regional fees associated with the transaction, and your own miscellaneous costs such as payment to your own attorney. 

Downpayment

In most loan programs, at least a portion of the downpayment must come from your own funds. This demonstrates to the lender that your home is an investment that is important to you. For example, if the loan program you select requires a 5% (some may be a low as 0% - 3%)  downpayment, and the purchase price on your home is $100,000, your downpayment will be $5,000. However, you may only have to provide a 3% downpayment from your own funds, totaling $3,000. The remaining 2%, or $2,000, can be a gift or grant. FHA loans are an exception since the entire downpayment may be a gift, and VA loans require no downpayment. 

Closing Costs

There are a number of costs associated with closing that range between 2% and 6% of the mortgage amount, depending on the costs and fees typical to your geographic region. Many first-time home buyer programs allow all or some of these closing costs to be paid by someone else. To eliminate surprises and help you prepare, you will receive a detailed "Good Faith Estimate" of your closing costs shortly after you apply for your mortgage loan. 

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Pre-paids/Reserves

Some loan programs require that, at the time of closing, you have additional money in your savings account equivalent to one or two monthly payments (principal, interest, taxes and insurance). If PITI reserves are required at closing, they frequently must come from your own funds. Your loan officer will provide exact details for you.

Property Value

How does the lender determine the fair value of the home you are purchasing? 

Every lender must protect your investment as well as its own, by hiring a trained appraiser to inspect the property you want to buy and determining its "market value." The appraiser determines market value by comparing your property to similar nearby properties which have been sold recently. These properties are called "comparables" or "comps." If homes like the one you want to buy have sold for about the same price the seller wants you to pay, then the appraisal should present no problem.

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Other Compensating Factors

How closely does your financial condition (income, assets, credit) need to match the loan criteria? 

Approval guidelines for each loan product are just that: guidelines. The guidelines for every loan product include what are referred to as "compensating factors." This means that although your financial condition may be "weak" in one area, other strengths can compensate for that weakness. 

For example, in determining your ability to make your monthly payments, the lender uses "qualifying ratios." These ratios differ from loan product to loan product. If your qualifying ratio is higher than the acceptable ratio for that loan program, the lender will look for "compensating factors." 

Compensating factors may be one or more of the following: 

Is the full downpayment coming from your own savings? 

Will you have a relatively low loan-to-value? 

Have your rental payments been roughly equal to your projected PITI payment, and have they been made on time? 

Have you been able to consistently save money over the years? 

Do you have savings above and beyond what will be required for the downpayment and closing? 

Are you in an employment position that has upward mobility? 

If one or more of those factors can be answered positively, they may compensate for a high "qualifying ratio."