What a banker sees when qualifying you for a mortgage

What a Banker Sees when qualifying you for a mortgage

Marcia Stolle is a mortgage loan officer with Paramount Mortgage who is a seasoned lender. She knows how to counsel buyers to get the best loan and help them with their credit if need be. Here she lets us in on what a banker sees when qualifying you for a mortgage.

Qualifying for a mortgage can be a tough challenge and can sometimes end unhappily – with a rejection. A new survey offers buyers a rare peek inside the heads of credit-risk managers at financial institutions. The reasons for the turndowns typically involve multiple factors: below-par credit scores, inadequate documented income to support the monthly payments, little or no savings in the bank.

But a new survey by credit-score giant FICO offers buyers a rare peek inside the heads of credit-risk managers at financial institutions across the country and in Canada. Researchers asked a representative sample of them what single factor in an application makes them most hesitant to fund a loan request – in other words, what’s most likely to prompt them to say no.

#1 DTIs (Debt to Income)

Surprisingly, according to the results, the number one item is not your credit scores. It’s not how much you’ve got for a down payment or what’s in the bank. It’s your “DTIs” – your debt-to-income ratios. Nearly 60 percent of risk managers rated excessive DTIs their No. 1 concern factor. Yet many new buyers have only a rough idea about their own DTIs, how lenders view them, and what sort of limits they’re likely to encounter. Debt-to-income ratios for home loans are the most direct indication to a bank about whether you are going to be able to afford to repay the money you want to borrow.

Debt ratios for home loans have two components: The first measures your gross income from all sources before taxes against your proposed monthly housing expenses including the principal, interest, taxes and insurance that you’d be paying if the lender granted the mortgage you sought. As a general target, lenders like to see your housing expense ratio come in at no higher than 28 percent of gross monthly income, though there is flexibility to go higher if other elements of your application are viewed as strong.

The second DTI component – the so-called back-end ratio – measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards that took effect in January, your back-end ratio maximum generally is 43 percent, though again there is wiggle room case by case.

A good place to learn more about DTIs and to compute your own is Fannie Mae’s consumer-friendly “know your options” site (www.knowyouroptions.com), which includes calculators and other helpful tools.

#2 New Credit Apps

The new FICO survey found that the second leading cause of concern for loan officers is “multiple recent credit applications.” Lenders spot these on your credit reports and take them as signals that you are seeking to add on even more debt, which could affect your ability to repay the mortgage money you’re asking them to give you.

#3 Credit Scores

In third place as an instant turnoff: your credit scores. Most lenders want to see FICO scores well above 700. Fannie and Freddie averages were in the 755 range in May. FHA average approved scores were a more generous 684.

Bottom line here: If you want to be successful in your mortgage application, be aware of these key turnoff points for lenders and take steps to avoid the tripwires. Most important: Postpone your purchase until your DTI ratios tell you – yes, you can afford the house you want and lenders won’t reject you out of hand. Give Marcia a call if you have any questions.

Information courtesy of Marcy Stolle: Marcy Stolle understands the needs of home buyers. Her compassion helps place first-time buyers at ease, while her 28 years of experience in the mortgage industry proves she has what it takes to provide a smooth transaction for all of her clients Since she is well versed in all types of mortgages, from conventional and jumbo loans to government loans, Marcy knows how to find the right type of mortgage to best fit the needs of her buyers.