Today, I’d like to tell you what mortgage lenders look for in when deciding on granting your request for a new mortgage loan. Now this is not meant to be an underwriting class but a basic understanding of the process and what you’ll want to consider as you begin thinking about buying a new home.
When you’re looking for a new mortgage many lenders evaluate your credit based on the “Three C’s.”
Credit
Is it likely that you will repay the loan? Are your payments on time and up-to-date? Are you financially stable and reliable? What are your credit scores? Today’s marketplace, most conventional lenders require your scores to be in the 700+ range and most FHA loans a 620 score or higher.
Capacity
Are you able to pay the loan? What kind of outstanding personal debt do you have? Do you have enough earning power and net worth to repay a mortgage or home equity line of credit?
Collateral
What is the value of the home you are purchasing? The more money you put down the more favorable an applicant you become. The zero down loans are pretty much a thing of the past so a down payment. The lower the LTV or loan to value the lender is evaluating the better your odds.
There are a few more factors mortgage lenders look into when evaluating your capability of obtaining a loan. To confirm your responsibility and stability they may examine:
- Your monthly income
- Occupation and length of time with employer (two or more years is ideal)
- Home ownership status and history
- How often you move or have moved; patterns of behavior and the timing of that behavior
And there are other examples such as, if you had a charge-off (when the creditor sells your debt to a collection agency) in your credit file from several years ago and you’ve been able to maintain your credit over the years, you will be judged differently from someone who recently had a charge-off.
But whatever the case, it’s imperative to get off on the right foot when rebuilding your credit.. It is important to establish good credit behavior as early as you can in order to build a solid credit reputation.
Essentially, credit bureaus will look for five main characteristics when determining how high your credit score will be.
In descending order, they are:
- Past delinquency. If you have failed to make payments in the past, lenders fear you will repeat that behavior based on your bad credit history.
- How your credit has been used. Have you maxed out or spent close to the limit on a credit card? If so, then you may be considered a greater risk than someone who is more conservative with his or her credit line. Do you pay off your bill every month or a keep a revolving balance?
- How long you’ve established your credit history. The scoring models can judge each individual separately. Credit reporting agencies may take into account the duration of a person’s credit history.
- Frequency of credit inquiries. It is recommended that you check your credit once a year to see if you have a good or bad credit rating. Creditors requesting reports several times in a short period may send a signal that you are applying for a lot of credit due to financial difficulties, or that you are taking on too much debt and overextending yourself.
- Your credit variety. It is best to have a mix of installment and revolving loans (e.g., auto, credit cards, retail, etc). On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.
It is important to understand all the factors that determine if you have good or bad credit. It is never too early to begin building a good credit history and avoid bad credit inconveniences in the lending process. In addition, you’ll want to perform a bit of credit repair on any of the bad credit if you have any inaccuracies, outdated or any credit items not validated being reported.
If you’d like you can find out more about your credit report by getting a free consultation (Click Here) we’d be happy to help you determine what needs to be done to “prepare you credit” before you apply for a new loan.
Post your comments and let me know your thoughts.
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Herschel
Herschel, great post. For the past 18 years I have told my clients that the 3 C’s are the basis of qualifying for a mortgage. Today, we are also raising the level to the 4 C’s. The fourth C is “Character”. We as lenders have early payoff and early default standards to abide by.
Credit, Collateral and Capacity can be smoothed over with falsifying documents but as a loan officer we look at their character as well.