Before applying for a home loan, it's good to have an idea of how the lender will be assessing you. Typically, there are six key factors that lenders take into consideration when deciding whether or not to approve your loan application:
• Front-End Ratio
• Back-End Ratio
• Down Payment
• Credit Score
• Employment History
The front-end ratio represents the applicant's monthly mortgage repayments divided by their monthly income, then multiplied by 100. Lenders use the result to assess the applicant’s suitability. Now, ideally, you want your front-end ratio to be low. Anything over 28% and many lenders will consider you to be a high-risk borrower.
This is like the front-end ratio, except, instead of weighing your mortgage repayments against your income, it weighs your total monthly debt. When it comes to back-end ratio, anything over 36% will generally impact your ability to get a loan.
The next thing lenders look at is how much you can afford on a down payment. Now, while the preferred minimum is 20%, it's common to put down less, with over half of first-time buyers putting down just 6%. Buyers that put down less than 20% are generally required to obtain private mortgage insurance (PMI), which increases the mortgage’s monthly payment.
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Your credit score is also important. Ideally, you want to aim for a score of 700 or higher. Anything less and you may need to start asking around for a cosigner.
Most lenders will want to see evidence of your current and previous jobs, just to ensure that you're capable of maintaining a steady flow of income.
The last thing lenders will look at is your collateral. Essentially, this is an asset that the lender can seize, in the event that you cannot repay your mortgage. Assets commonly offered up as collateral include the home itself, automobiles, other property, investments, or a collection of valuable items. If the collateral you offer up isn't worth much, it may impact your loan's interest rates or your ability to secure a loan in the first place.