Tuesday, April 10, 2012

Learn the Mortgage Application Rules

If it's been a few years since you've applied for a mortgage, or if it's your first time, there are four key aspects to getting the best terms and best rates.   Each lender or broker will require their own guidelines, restrictions and rules, however, these four core concepts are standard throughout the mortgage world.  Keep in mind, THE LENDER IS LETTING YOU BORROW MONEY, you would be just as strict if an old college buddy came up and asked you for $250k...

1) Cash on Hand
I'm sure you think about it, but so does your lender (nowadays).  They want to make sure when all is said and done, after you close on your home, if you'll actually be able to afford it.  If after closing you have a good chunk of change still, you'll look a lot less risky than the applicant with $200 to his name post closing.  Also, your application will be stronger with a larger down payment, i.e. you've got more skin in the game, which is much less risky to the lender.  Along with down payment, they want to know where your money came from.  Was it a one time increase, like an inheritance, prize or gift?  Be honest and upfront with your lender and you won't have any surprises come closing.

2) Debt to Income Ratios 
Your lender will analyze two different debt to income ratios, often referred to as your front end and back end ratios.  Your front end ratio takes your entire monthly mortgage payment (including principal, interest, real estate taxes, insurance and private mortgage insurance) and divides that total by your entire monthly pre-tax income.  This helps to establish how big of a chunk your mortgage payment will take out of your monthly paycheck.  Your goal is to keep this ratio at or below 28%.  The back end ratio takes your entire mortgage payment used in the front end equation and adds it to all your other recurring debts, such as student loans, auto loans, credit card payments etc, and divides that by your total monthly pre-tax income.  This ratio measures how much other debt you have and your worthiness for credit.  Your goal is to keep your back end ratio at or below 40%.

3) Credit Score
Ah, your wonderful credit score.  The magical number that it seems your entire life is based.   This number is entirely based on past credit history, which predicts future credit behavior.  The factors at play here are your payment history, your total debt vs. total available credit and types of credit (revolving or installment).  The higher your number, the better your chances at getting a favorable loan.

4) Appraisal
To be able to let you borrow money, the lender will require that you use your home as collateral.  
Your lender will not lend you more money than they deem it to be worth.  That is why after you put a contract on your home, the appraisal will attempt to verify the value, so you can get your loan.   They need to be sure that if you default on your loan, they can at least reclaim a reasonable portion of the home's value.

Keep in mind, all of these aspects are important and work in combination with one another.  Working with an experienced and savvy lender will assure you get the mortgage you need, and be able to afford it after closing.

1 comment:

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