Lenders are primarily concerned about three things when considering your loan for approval: income, credit and property.
There are other aspects of your application that will be evaluated, such as your cash reserves, length of employment and the size of your down-payment, but the “big three” are the main factors that determine whether or not your loan is approved.
Lenders determine what you are likely to earn in the future. The amount on your check stub is used if you are paid a salary or by the hour. Overtime and bonuses can be used if they have been paid in the past and your employer states they are likely to continue. Other income has to continue for at least three years. If you are self-employed, lenders usually will average the income reported on your tax returns for the previous two years.
Once your income is determined, the lender calculates what percentage your new house payment (including taxes, insurance and HOA fees) will be of your monthly gross income. Lenders generally have a 29 percent to 35 percent maximum for the housing ratio. The lender then adds your consumer debt (minimum credit card debt, student loans, car payments) to your proposed house payment and again divides by your gross income to see if your “total obligation ratio” is under 38 percent to 45 percent. The maximum ratios vary based on the type of loan you are seeking, your credit and the amount of your down-payment.
Your credit history and FICO scores are important factors in the loan underwriting process. Loan programs generally have a minimum FICO score and set thresholds that, when reached, improve the pricing of your loan. So a borrower with just over the minimum score will have a higher rate and/or pay more up front.
In addition to verifying that the market value of the home is at or above the purchase price, lenders review the appraisal to make sure the home is habitable and marketable. An example of a home that is not marketable is an off-the-grid or earth home because there is not widespread demand for these types of homes.
If the home does not meet the lender’s standards (the roof is leaking, furnace is missing, etc.), the buyer can request that the seller make repairs prior to closing or you can terminate the contract.
There are lending alternatives for properties that do not meet the standard lender requirements.
Steve Setka is an exclusive buyer’s agent with Keller Williams Realty in Durango and a licensed mortgage originator. He can be reached at 903-7782 or firstname.lastname@example.org.