Are you the Ideal Mortgage Applicant?

Are You an Ideal Mortgage Applicant?
By Susan Keenan
Photo © Lisa F. Young - iStockphoto
Most lenders check on three main criteria when evaluating a mortgage application. The amount of loan you qualify for and the interest rate quoted will be based on an assessment of your credit score, available cash for a down payment and your ability to make monthly payments. These factors help a lender to decide on their perceived risk in giving you a loan.

What is your credit score?
To qualify for a mortgage, your credit score should be more than 620. Paying bills on time, keeping credit accounts open—don't cancel existing accounts just before applying for a mortgage—and keeping your credit card debt to a minimum should improve your credit rating.

How much can you afford as a down payment?
Lenders want to know how much you can contribute as a down payment towards the purchase. Most lenders limit their funding to 80% of the purchase price. When deciding on your contribution, get an estimate from the lender of the closing costs involved. These costs, which consist of attorney fees, taxes, points, title insurance and such, are due at the time of closing and should be considered when deciding on your total cash outlay for your home.

Will you be able to afford a mortgage payment?
A lender will look into your ability to consistently make monthly mortgage payments. The current mortgage crisis has prompted lenders to scrutinize documents relating to employment, income and assets. Documents such as pay-stubs, letters from employers or bank statements may be submitted for this purpose.

What is your debt to income ratio?
Lenders usually look at two ratios when evaluating mortgage applications. The front-end ratio or debt to income ratio is your monthly principal, interest, property tax and mortgage insurance payment taken as a percentage of your gross monthly income. A value of 28% or less is acceptable.

The back-end ratio is the total of all your debt obligations and commitments, such as alimony or child support, expressed as a percentage of gross monthly income. Lenders check for a value of 36% or less for this ratio. If you are encouraged to take on a higher loan, it is best to exercise prudence and accept an amount that you can deal with.

Despite the best of preparation, crises such as job loss or illness can leave you financially depleted. To ensure that you have sufficient funds to meet your mortgage and other day-to-day expenses, maintain a contingency fund that can cover your financial commitments for a minimum of three months.