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What Do Lenders Look For When Qualifying Someone For A Loan?

Jul 27, 2008
The information you are about to read will give you some insider knowledge that will help you understand how the mortgage industry operates and will help you avoid making costly mistakes that you could end up paying for years to come. It is my hope that this report will provide some insight that will enable you to make better decisions when it comes to choosing between the many different mortgage programs available today.

First you need to understand the basic requirements that lenders look for when qualifying and individual for a loan.

First they will want to know what is you ability or capacity to pay back this loan.

Think about it this way, if a friend or family member asked you to borrow some money, you would want to know that they would be able to pay you back and within a timely fashion.

So you would start asking questions such as do you have a job? How long have you been on your job, lenders want to see stability such as at least 2 years of verifiable job history. Then how much do you make? Lenders want to see that there is enough disposable income to take care of more than just the basic necessities.

By asking these questions and verifying it, you would be able to determine if the borrower could afford to pay the loan back to you whether as installments or a lump sum and when.

Lenders are no different. They will ask for your income and a list of your debts, by collecting this information, this will allow them to figure out how much you can afford and at what monthly payment. Because some people are paid weekly, some bi-weekly, semi-monthly or monthly, such as those on Social Security Income.

Since bills are paid on a monthly basis, lenders will calculate your income on monthly and divide it by your total monthly debt or expenses to get what is known as you debt-to-income ratio as a percentage.

Traditional lenders like to see this Debt-to-Income Ratio, D/R as 28/36. A high D/R means that you have a large percentage of debt compared to your actual income and it will be more difficult for you to pay an additional monthly payment than it would for someone with a low D/R.

The second thing the lenders want to know is, what is you ability to pay back this loan? This is why they will request to see a tri-merge credit report. This will tell them your demonstrated payment history of your current and or past debts. Modern credit reports calculate the amount of credit you have accumulated, how much of it you are using (Are all your credit cards maxed out?), and whether you have paid the required payments on time.

They summarize all of these factors in a Credit Score, sometimes known as a FICO Score, which predicts the likelihood that you will default on a loan.

Note: a word about your credit. Many people learn in the process of seeking a mortgage loan that their credit needs attention. It is recommended that you check you credit at least once per year, as to catch errors that could be harmful to your credit and cost you thousands of dollars in interest payments.

Many credit cards companies now provide this information complimentary, but if you credit card doesn't do so, you can request a free annual report from each of the major credit bureaus such as Equifax, Trans Union and Experian. It is important to get all 3 as that what lenders look at, and nowadays you are able to get all 3 scores as well for a nominal charge.

The third thing the lender wants to know is, "How much interest should I charge?" This is determined by the degree of Risk. Someone with a low credit score and a high D/R is a greater risk of not paying than someone with a high credit score and a low D/R. To offset higher risk, lenders charge a higher rate.

Another risk factor lies in the amount being borrowed compared to the value of the property. In other words, if you default on the loan, how easily will it be for the lender to recoup their funds. A mortgage places a lien on your property in the amount of the mortgage, so if you default, the lender can foreclose and sell the property to get his money back.

This is why traditionally; loans that total more than 80% of the property value will require the borrower to take out PMI (Private Mortgage Insurance). Most people get this type of insurance confused and assume that it protects them if they can't make their payment, but instead this is the type of insurance that protects the lender for any amount of the loan in excess of 80% of the property value if they ever have to foreclose.

It is also why loans of 100% or even 125% of the property value charge significantly higher interest rates to offset the greater risk.
About the Author
Marlon Baugh is a nationally-known mortgage expert. Since 2003, he has specialized in mortgage loans for people with Bankruptcies, Foreclosure or with other credit issues, as well as Commercial Mortgages. If you would like get instant access to the remainder of this report visit http://www.specializedfinancialsolutions.com/lendersexposed.htm
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