Are you planning to buy your dream home? Then like most people you probably have questions about what mortgage lenders look for before they approve of your loan. They look at several things to ensure that you are a responsible borrower and will pay back your loan on time. However, there are three key numbers to take into account first as they can affect your ability to qualify for a mortgage and ultimately determine which home you can buy.
Let us take a look at what they are and how they matter.
1. Credit Score
You probably already know what a credit score is. It typically ranges between 300 and 850 and it takes into account your past payment history, how much debt you owe, your credit limit usage, and more. So, when you take out a mortgage the first thing that lenders do is check your credit score to evaluate your likelihood of paying it back. Each type of loan has its minimum credit score for eligibility. For example, the minimum credit score requirement is 620 for conventional loans. However, if your score is below the mid-700s then you will have to pay a higher interest rate. But, the credit score requirements are much more relaxed for FHA and VA loans. So, though you can get a mortgage with even a low credit score, a very good score will give you more loan options. Also higher the credit score the better the interest rates. While a higher interest rate may not seem much at first glance, but, even a 1% decrease in your interest rate can help you save thousands of dollars over the life of the loan. Additionally, you will require to pay a lesser down payment and get a lower mortgage insurance rate for loans with less than 20% equity.
This proves how important a good credit score is for mortgage loans. So, you should start improving your credit score sometime before you apply for a mortgage. Start by applying for a free copy of your credit score from the three major credit bureaus through annualcreditreport.com. Review and identify any mistakes that can bring down your score. Next, try to pay down high-interest debts and make payments on time.
2. Debt-To-Income Ratio (DTI)
Your mortgage is not the only bill that you will pay each month. So, lenders will want to ensure that you can comfortably afford to pay for your mortgage currently and in the future given your existing monthly debt payments. To determine this they calculate your debt-to-income ratio(DTI). This is done by adding all your monthly debts and dividing them by your gross monthly income(i.e., the amount you earn before taxes). It takes into account student loans, auto loans, minimum credit card payments, and your future mortgage payments. For example, if your before-tax income is $5000 and your monthly payments are $2700 a month then your debt-to-income ratio will be $2700 divided by $5000or 54%. When calculating your debt-to-income ratio lenders include your proposed new mortgage expenses and not your current housing expenses. Now, what is a good DTI? Although different, lenders have different requirements, most lenders typically tend to avoid lending money to applicants with a DTI above 43%. This is because lenders want to ensure that borrowers can make their monthly mortgage payments without overstretching themselves. So, before you plan on purchasing a home you will want to keep your DTI as low as possible. If you have a DTI of less than 43% then it may be a good idea to slow down the house hunting and work on paying off large debts before you turn in your mortgage application. You should also avoid taking on new lines of credit. Keep in mind that a low DTI means qualifying for a mortgage and making the mortgage process smoother.
For more information read our blog “What Is Your Debt-to-Income Ratio and How Does It Impact Your Mortgage Application?”
3. Loan To Value Ratio (LTV)
Your loan-to-value ratio or LTV is the loan amount divided by the property’s value. Another way of thinking of LTV is the measure of your home’s equity or value minus the percentage you still owe towards the principal so that the home fully belongs to you. If you are getting a mortgage it is easy to calculate your LTV. For example if the value of the property is 200,000 and your loan amount is 180,000 then 200,000/180,000 = 0.9 or 90% LTV. Another way of calculating LTV is by subtracting your down payment percentage from 100%. So, if you make a 20% down payment then your LTV will be 80%. Therefore, your LTV will depend on the value of the home you are buying and how much you will put towards the down payment.
There are loan programs that have a very high LTV of 97%. This means your down payment will only be 3%. However, borrowers will have to be prepared to pay an additional monthly fee for private mortgage insurance (PTI) if they do not pay for a down payment of at least 20%.
If you want to talk through your numbers contact us today for a free consultation. Our experts are ready to help make your home happen.