Six Factors that Determine Your Home Loan Qualification

When underwriters consider your home loan application and credit history, they generally look for 6 basic factors.  That being said, know that underwriters do show a degree of variation in the ways they assess a potential borrower’s risk.  After all, underwriters are human beings – not computer programs.  Each borrower is examined using calculated numbers as well as judgment, so two underwriters may look at the same borrower, with one giving a yes and one giving a no.  That’s why it’s important for borrowers to try another lender if they’re rejected their first time.

Knowing that there is some degree of variation, borrowers should still understand the 6 areas that are considered during their loan approval process.  The more borrowers understand about their credit, the better they can maintain (or improve) their overall financial standing.

1)  Credit history – One of the first steps in approving a loan is pulling the potential borrower’s credit record.  This history shows not only the bad things (such as foreclosures or bankruptcies), but also the good (such as attempts of repaying debt).  Using this record, loan processors try to determine how reliable you’ll be for paying back the loan that you’re asking for.

2)  Liquid assets – Loan processors also want to see how much money you have sitting in checking and savings accounts.  They’re not looking specifically for large sums, but rather they want to see that you generally keep enough money in your account to cover unexpected emergencies.  If you’re literally living off what you make each month, lenders may assume that it’s only a matter of time before you miss a payment due to inadequate funds.

3)  Debt to income – Lenders look at the ratio of money you owe to the money that you make.  They generally calculate in the costs you’ll incur from the current loan that you’re requesting.  So, putting in this requested home loan with previous loans (from credit cards, school, car, etc.), they’ll establish a debt to income ratio.  The lower this ratio, the better.

4)  Income – In order to establish this debt to income ratio, the lender will need to consider your current monthly income.  The lender will ask for previous pay stubs and income tax forms in order to see that you have a stable job with stable income.

5)  Loan to value – This ratio is also called LTV.  Lenders calculate this number by taking the loan amount you’re asking for and dividing that number by the home’s appraisal’s value.  The more money that you’ll put in the down payment, the lower this loan to value ratio is (and the better off you’ll be in the loan approval process).  Lenders specifically look at this ratio because statistics show that the more money you have invested in a property, the less likely you’ll default on the loan.

6)  Appraisal – Your lender will require that the home is appraised before they sign a loan over to you.  This step is to ensure that the home is actually worth what you’re lending to pay for it.