If you are worried about the risks of getting a mortgage loan, it’s important to note that these risks are even higher for your lender. Of course, the property is held as collateral in all cases. But that’s not your lender’s goal.
In fact, they prefer you to meet your monthly payments and get full equity of the house or land you bought. This is the main reason why lenders set a list of criteria for you, to ensure you are qualified for the mortgage loan.
This list includes:
The Down Payment You Will Need
The down payment rate lenders mostly prefer is 20 percent. Nevertheless, there are plenty of other cases where the rate is much lower. While such mortgage loans are good for future homeowners, it often represents a decreased investment to the lender. Therefore, they may impose other payments such as the PMI payments, or complicate the qualification process to reduce any risks.
The Credit Score You Will Need
The credit score is calculated based on your credit records. It reflects your worthiness of getting credit and your ability to pay it back. This is why lenders evaluate your credit score and compare it to other credit scoring models to decide whether you qualify for a mortgage loan. Lenders approach credit scores in various ways. Generally, the Fair Isaac Corporation standard is the model lenders use the most. This credit score standard ranges from 350 to 850. But most commonly, high credit scores can easily qualify you to better interest rates.
Your Loan to Value Ratio
The loan to value ratio indicates how much of the house value is encumbered by debt. Lenders calculate this ratio by dividing your mortgage loan by the value of the home. Let’s say you purchased a house that is worth $100,000 with a $30,000 mortgage on it. In this case, your loan to ratio value would be 30 percent. Since most lenders use the loan to value ratio to identify the safety of the collateral, the higher your LTV is, the riskier it gets, which may lead to higher interest rates.
Your Debt Ratio
There are two types of ratios you can calculate to estimate your general debt ratio. The first one is called the front-end ratio. It usually demonstrates your housing ratio. And the second one is the back-end ratio. This one includes your monthly recurring payments and debts, such as student loans or car payments. Overall, the former should not exceed 28 percent, while the former should be less than 36 percent of your monthly income.
How an Automated Underwriting System Works
We know how complicated and time-consuming all the calculations we mentioned above may sound. For this reason, lenders, as well as future homeowners, rely on automated underwriting systems to do the math. To check whether you qualify for a mortgage loan, this software program will make all the calculations you need based on the information you provide. Nevertheless, you will still need to present official proof later on.