So you’ve agreed on a price for your new dream home and now all you need is to secure a home loan. This lengthy, detailed process involves mounds of paperwork, but in essence the whole thing can be boiled down to two pertinent factors—creditworthiness and debt-to-income ratio.
These are the primary criteria used by banks to decide whether to approve or reject loan requests, according to an explanation provided by the folks over at the Zillow Blog. Among other things, loan underwriters do an analysis of an applicants credit history, employment record and financial assets and liabilities to make a determination.
Of primary concern to banks when deciding on whether to give a loan is, of course, creditworthiness. Generally, banks will use a mortgage credit score that is based on an analysis of your credit ratings with various entities. This includes the three major credit repositories—Equifax, Experian and TransUnion—as well as your FICO score, which is provided by the Fair Isaac Corporation. A lender will purchase these various reports and credit scores (at a cost that’s passed back to you) to determine the type of risk you may pose, as well as to determine the proper mortgage loan product that fits your needs, according to the Zillow Blog.
If a potential borrower is deemed creditworthy, the second most important factor to securing a home loan is debt-to-income ratio. This is used by lenders to determine what impact a mortgage payment will have on a borrower’s ability to repay the loan. Debt-to-income ratio, or DTI, compares an individuals monthly gross income to monthly debts.
Monthly debt considered in the process include all consumer debts that appear on a credit report, as well as other expenses like alimony or child support. Typically, the amount of debt can be no more than 40 percent of your gross income minus the costs (principal, interest, taxes, insurance) associated with a mortgage loan.