John moved to Salt Lake City, Utah at the beginning of the year. It was a career move prompted by a salary higher than what he was making at his old job. Making the move has allowed him to buy his first house. And now that he has made an offer and had it accepted, he is waiting on the bank to approve his mortgage.
Have you ever wondered what mortgage lenders look at when considering buyers like John? If so, you are not alone. The average consumer doesn’t fully grasp the mortgage approval and underwriting process. They go into the home buying experience assuming that lenders will beg to give them mortgages.
Unfortunately for buyers, that’s not how it works. Experts at the CityHome Collective real estate brokerage in Salt Lake City say that banks are very choosy when it comes to writing mortgages. They look at very specific things before approving mortgages for luxury homes, affordable single-family homes, condos, and lofts. Approval is more about the borrower than the property being purchased.
Credit Score and History
One of the biggest things mortgage lenders look at is a borrower’s credit score and history. Credit score is a mathematical representation of how likely a borrower is to default on a loan. Credit history tells lenders all about a person’s past and present debt and payment history.
When analyzing credit score history, lenders look at the following:
- Recent credit applications
- Credit utilization
- Borrower payment history
- Statement disputes
- Credit blemishes (foreclosures, repossessions, etc.).
It goes without saying that borrowers with good scores and histories are offered better deals. They enjoy lower interest rates and more amenable terms. Borrowers with poor credit histories and scores get less attractive offers.
Almost as important as credit score and history is a borrower’s debt-to-income ratio. The debt-to-income ratio is the numerical representation of the amount of money the borrower owes as compared to how much he or she makes. Why do banks care? Because it tells them how much a borrower can realistically afford in monthly mortgage payments.
The general rule for many decades has been that home buyers should not spend more than the equivalent of one week’s pay on housing expenses. This includes mortgage payments, insurance, etc. Economic realities have led to a slight relaxation of that rule, but not by much.
Down Payment Amount
Lenders also look at the amount a buyer is willing to put down. A 20% down payment virtually guarantees a good deal as long as everything else is satisfactory. But know this: the lower the down payment, the less attractive mortgage offers tend to be. This is due to something known as the loan-to-value (LTV) ratio.
LTV represents the amount of money a bank is willing to lend as compared to the value of the property being purchased. Thus, a 75% LTV on a $100,000 house would mean a buyer can borrow a maximum of $75,000. The remaining $25,000 – plus closing costs and other expenses – has to be paid by the buyer up front.
Lenders typically offer higher LTVs to people who need them. Many of them will also finance closing costs. But there is a trade-off for both. Higher LTVs and closing cost financing add to the lender’s risk. They account for that risk with higher interest rates and fees.
Mortgage lenders look at a lot before approving an application. They do so to protect themselves and the applicants. The last thing lenders want to do is take unnecessary risks by approving mortgages that really should be declined.