Whether you are a buyer or a seller, knowing how a mortgage lender scrutinizes a home buyer to qualify them for a loan is important information. For a buyer, it obviously helps them make plans in their financial lives to be able to qualify and get the lowest rates possible. For a seller, it helps to know what hoops the party on the other side is going to have to jump through so that they can qualify to buy your home. A home is never closed till the fat lender sings. Sorry, that sounded way better in my head. Anyway, here are the five critical areas lenders scrutinize when qualifying a buyer…
1. The borrower’s assets
The lender wants to make sure that the borrower has enough cash (or liquid assets) for closing and back-up funds (think nest egg). They also look at your other assets…
- retirement funds
- stocks and bonds
- personal property
- real estate
- and anything else you own or have paid for
They use your total assets and subtract your total liabilities to get your ‘net worth’ which helps them determine certain ratios they use to decided whether or not to lend a buyer money.
2. The borrower’s liabilities
What revolving and installments accounts does the buyer have? Are there any late payments in the last two years?
Are there any child support or alimony payments to consider?
Does the buyer have pledged assets or unsecured loans?
3. The borrower’s ability to repay the loan
How able is the borrower to repay the loan? A lender will look first at income and employment stability to determine a borrower’s ability to pay.
4. History of repayment of debt
A lender will run a credit report to determine the borrower’s creditworthiness. If you are ’shopping lenders’ remember to have the first one you go to run your credit… then get a copy and give it to all the other lenders you get rates and terms from. That way, there will be no effect on your credit score.
Lenders also look at your mortgage history rating if you have a property you have previously made payments on.
5. Standard qualifying ratios
Generally speaking, the total housing payment PITI (principle, interest, taxes, and insurance) should not exceed 28% of your total gross monthly income.
Also, the total monthly debts, including housing, should not exceed 36% of the total gross monthly income.
I hope this helps you understand the challenges borrowers face in getting a loan. I’m a big believer that knowledge is power. If you know how late payments affect your credit… you’ll be diligent and make your payments on time. If you know that you need stable employment history to buy a home… maybe you’ll consider staying employed at your current job instead of looking for another one. I hope you enjoyed the article and find it helpful in purchasing your next home. Please let us know if my company or I may be of service to you.