Following the financial crisis of 2008, lending standards tightened. Over the past 10 years, these standards have become less stringent but consumers are still finding their loan applications are being denied. There are many factors that are reviewed during this process but a few rise to the top.
1. Debt-to-income ratio
Often referred to as the “DTI,” the debt-to-income ratio is the percentage of your gross monthly income that goes toward paying your monthly mortgage payment. For instance, if your Gross income (before all deductions) is $5,000 a month and you have monthly expenses (your minimum monthly payments reflecting on your credit report) that total $2,250.00, your DTI would be 45 percent.
It’s fairly simple to calculate: Add up all of your reoccurring monthly debts, using only the required monthly payments, and divide that number by your gross monthly income.
Since lenders are using your gross monthly income and only your monthly obligations reflected on your credit report, the desired DTI is 45% or less. In many cases, staying within these guidelines will keep your mortgage payment in a comfortable range for your budget. Recurring monthly payments included in the calculation are: your new, proposed mortgage payment (which includes all real estate taxes, insurance as well as mortgage insurance and Home Owner Association dues); and your other payments such as your auto loan, student loans, minimum credit card payments. When the total of these monthly obligations calculate to a DTI above 45% it could cause a denial of your loan application.
To reduce your DTI you can reduce your new mortgage payment by looking at a lower purchase price, increasing your down payment or paying off and reducing your debt to lower your monthly payments. A good rule of thumb is to avoid applying for or opening any new debts during the six months prior to applying for a mortgage.
2. Credit history
When applying for a mortgage, lenders will turn to the credit reporting agencies to analyze your credit history and score. It is a good idea to review what is being reported on your credit by utilizing one of the free credit sites to confirm what is being reported is accurate and get a general idea of what your VantageScore is. These free sites are a great source although there will be a variance from these scores to the FICO scores the mortgage industry uses. Lenders and different loan programs will require a minimum FICO score so it is always best to consult with your PERL Mortgage Loan Officer and review your credit score information to determine where your score lands for loan programs available.
Good practice to keep your credit score positive would be to maintain on-time payments, keep several (three is a good base) accounts open and use them minimally and pay them down or off. Keep your accounts open as this builds a credit history. Lenders use your credit report and history to assist in determining your ability to pay.
With any good investment, you want to know that the collateral you are investing in is a good value. Since the lender is investing with you through the mortgage, they require documentation to confirm this. You may have agreed to pay, but the lender must confirm that it is actually worth that amount. The way this is done is by determining the value through hiring an independent appraisal company to examine the interior of the property and study recent comparable sales. The appraisal protects both the borrower and the lender because it’s an excellent way to ensure you are not paying too much for your home.
Note: In the current real estate environment, bidding wars can ensues on your dream home, remember to stay focused on your budget, utilize the expertize of your real estate agent and the current market values and walk away if the bidding gets too high.
These top variables are unique to each buyer so PERL Mortgage encourages homebuyers to consult with their local Loan Officer to review these items in detail to set you up for success and loan application approval.