The 4 “legs” of a loan are:
1. Credit Score
2. Loan To Value
3. Debt to Income
Credit scores are fairly easy to understand: If you pay your bills on time, you should have good credit. Credit scores allow lenders to evaluate the past payment history of an individual and determine the implications in regards to future probability of loan repayment.
Credit is an important determining factor in many areas of one’s life. It can determine the interest rate they receive on car loans, credit cards, and mortgages. Even employers sometimes look at credit scores to determine is a candidate is worth the financially responsible. It is important to review your credit report regularly (at least once a year) to determine what is being reported about you and to make sure the information is accurate. Many lenders have analyzers that can help determine if there are things and individual can do to improve their scores. These analyzers can often predict “what-if’s”, such as paying off or down on various accounts, opening or closing accounts, and increasing or decreasing a credit line. These various actions can often reward the individual with the ability to maximize their credit scores.
Loan to Value (LTV) is the amount you are putting down to the value of the home or the equity you have in your home. The more you put down the less risky you are to a lender. If you have sufficient resources to purchase the home in cash you do not need a mortgage. For those of us that are not in that situation we will want to balance our precious resources of cash to the cost or monthly payment to find a balance that works best for each family’s personal situation.
Debt to Income (DTI) indicates to the lender whether or not you can afford the home. Lenders consider 2 ratios: The Housing Ratio and the Total Debt Ratio (also known as “front ratio” and “back ratio”). When one thinks in terms of a budget, they typically look at their net income or what they take home each month. Mortgage lenders look at the Gross income with W-2 borrowers. Income is calculated differently for a salary borrower than it is for an hourly borrower. If an individual works 2 or more jobs, receives bonuses, overtime or commission, then 2 or more years of these records are necessary to be able to use the income to qualify. In addition, the most recent 2 years of filed federal tax returns with all schedules and W-2’s are analyzed to determine the income that can be used to qualify. Often times, prospective borrowers are shocked to learn that unreimbursed employee expenses on their federal tax returns can impact their ability to count the income they believe they are earning. Self-employed borrowers are calculated in yet another way.
Documentation is rather easy to understand in that it is just the need to provide the documents necessary for a lender to make the determination of risk. Typically a lender is going to require a minimum of 1 months’ worth of pay stubs, along with year to date info. In addition, the past 2 months of the most recent asset/bank statements will also be taken into account. It is important that an individual is prepared to provide all pages of the required statements, in addition to sourcing any of the deposits that are not direct payroll deposits. Be especially careful during the time of a mortgage transaction to limit or eliminate any “non- sufficient funds” as well as overdraft protection charges.
Depending on the Program, each of these 4 legs will impact the loan and qualification/pricing. Send me an email at email@example.com or give me a call at (703) 929-1701 so we can determine the program that will best benefit you.