This video reflects the perspectives of the Gaylord-Hansen Team at loanDepot. We advise discussing directly with your mortgage expert or lending professional for any advice regarding your particular situation.
There are three primary factors lenders use to determine whether a potential homebuyer is qualified. We call it "CIA": Credit, Income, Assets.
Credit is important to the equation, as this shows a lender your responsibility to paying your credit obligations on time. A home mortgage will likely be the largest debt you will ever have, and the mortgage company wants to know you take your current debts seriously and pay on time.
FICO scores are used in the algorithms of automated underwriting systems. FICO scores, also known as credit scores, provide the foundation for lenders to determine the creditworthiness of a borrower. We go in depth on credit and credit scores in future videos, as this can be a critical component to qualifying. Credit is a game, and your 3-digit number will follow you for your entire life. It is extremely important to know how to play the game of credit. Believe it or not, knowing how to play the game of credit can save you hundreds of thousands of dollars over your lifetime.
The second leg to the stool is income. In the mortgage industry you will likely hear the term “ability to repay.” It is the requirement of the lender to determine your ability to repay the loan. This is primarily determined by understanding your source of income. There are many different types of income, including hourly and salaried wage earners, commission income, bonus income, disability income, pension income, social security income, investment income, etc..
The lender wants to see that you have had a history of earning income and that there is a high probability the income will continue into the future.
With respect to your income, the lender will determine if it is enough to cover your current monthly debt obligations reflected on your credit report, as well as the proposed mortgage payment you are applying for. We call this DTI or Debt-to-Income. This ratio has some variance depending on your entire financial profile, however, the general guideline is your debts should be around 43% of your GROSS monthly income. Gross monthly income is income before taxes are taken out.
The third leg to the stool is assets. Assets is just a fancy word meaning money for a down payment. In other words, do you have enough money for a down payment and closing costs. These monies can be in a checking account, savings account, investment account, or even include gift funds from a family member.
There are a number of low down payment options that require 3% to 5% of the purchase price as a down payment. In addition, there will likely be additional monies needed for closing costs as well. However, there are ways to reduce your out of pocket costs by working with your Realtor to negotiate seller paid closing costs. Your lender can also help cover closing costs by structuring your loan appropriately. Don’t be afraid to ask for help.
Our team will work with you to understand your “CIA” and help you get your three legged stool standing.
Buying a home is a BIG decision, and getting a mortgage can be overwhelming. You don’t do this every day, but we do!
That's why we want to educate you and provide clarity every step of the way so you can make an informed decision.
Follow our GH Mortgage University series so you can learn how to make smart financial decisions to build your future through homeownership.
Your credit score can be the determining factor on whether or not you will be able to qualify for a mortgage.
April 13, 2020 | Bill Gaylord discusses how to know if it's a good time to refinance your home loan.