Mortgage is a complicated process. To ensure a smooth loan process, it is important to understand what lenders expect. Mortgage underwriting centers around the concept of risk assessment regarding the borrower. The following is a basic mortgage overview about mortgage and what lenders look for.
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Lenders want to make sure borrower has the ability to repay mortgage. Part of the requirement is to check if borrower has stable employment history. Same applies to self-employed applicant.
In the United States, there are several credit score agencies, such as Equifax, Experian, and Transunion, that keep track of your credit scores. During a loan process, lenders will check borrower’s credit score by pulling borrower’s public record. Credit score is determined by many factors, such as if a borrower has been paying bills on a timely manner or not. Credit score is an indication how financially responsible a borrower is while meeting financial obligation.
A borrower’s income level is another key factor lenders check to determine how much mortgage can a borrower be qualified for. The higher the income the better. However, not all incomes can be qualified for mortgage. There are certain types of income that may not be included when considering a borrower’s income qualification.
Lenders will examine borrower’s monthly recurring debts. Recurring debts may include anything from car loan payments or car lease, credit card debts, student loans, to even alimony and child support. Basically lenders want to know how much existing debt a borrower is responsible for. It is important to note when lenders calculate debt, the debt will include not only a borrower’s existing debt, but also the future mortgage liability of the subject property that borrower intends to buy. In case of refinance, the existing mortgage will be replaced with new projected mortgage in debt calculation.
Debt-to-income ratio (or DTI) is another important calculation used by lenders to determine if borrowers are qualified for mortgage, and if so, are they qualified for the loan amounts they seek. Debt-to-income ratio is a borrower’s total monthly liabilities, including future mortgage liability of the subject property, divided by borrower’s gross monthly income. The debt-to-income ratio needs to be within lender’s guideline in order to qualify for loan.