Lending to a Potential Home Buyer

Some lenders still sit their customers down for face-to-face interviews, but in today’s fast-paced society, this has become impractical for many institutions. Thus, the interview has disappeared, and the process has become a big paper shuffle. It starts with the traditional loan application and ends with you either signing a mortgage commitment letter or reading a rejection letter from the lender.

Believe it or not, most institutional lenders do not consider subjective factors when deciding whether to lend you money. The process is simply a mathematical calculation, a scoring if you will. The days of “It’s A Wonderful Life” are gone. The banks aren’t interested in Mr. Johnson’s life history so much as they are interested in his asset-to-debt ratio. In fact, below is a list of factors that lenders weigh most heavily when deciding whether to lend you money for a house:

Credit Report:

Q Income: What is your present income?

Q Expenses: What are your current expenses?

Q Income/Expenses Ratio: Disposable income equals the amount earned by you in a given month which is left over after you pay your expenses for the month. Is it enough to carry the mortgage for which you are applying?

Q Assets: What assets can you fall back on in times of trouble? Do you own a car, a boat, another house? How much do you have in your bank accounts, your retirement accounts, your stock portfolio?

(If you expect to buy the house with money given to you by a relative or friend, you’re

going to need to document it with a “gift” letter from the person. The sudden

appearance of a lump sum of money must be explained to your lender.)

Q Debts: What are the outstanding balances on your credit card accounts, student loans, car loan, etc.

Q Asset/Debt Ratio: This ratio is less important than the income/expense ratio. Your assets do not necessarily have to exceed your debts in value (whose does?), but any lender will hesitate to give a loan to someone who owns only a car and a stereo yet owes $150,000.00 in loans and credit card debt.

Q Employment: This is about as subjective as a mortgage application gets. The lender wants to know things like how you make your living, how long you’ve held your present job and what your salary was the past two years. If your salary now deviates substantially from previous years, you must explain the jump or decline.

(It is important to note that lenders want to see that you’ve been working at your present job for at least two years. However, even if you have been working at your present job for less than two years, it usually is satisfactory if you have been in the same line of work or at least the same industry for more than two years.)

Here’s the subjective part. Say you are on the bubble, and the lender is looking for some reason to approve or reject your application. All other things being equal, being a professional (e.g., doctor or accountant) is better than being a furniture salesperson because it is deemed to be more stable of a career, with more earning potential. Further, a salaried employee is looked upon with more favor than a self-employed applicant. Once again, the stability factor plays a big part.

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