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Through A Mortgage Lender Eyes - What Are Banks Really Looking At When You Apply For A Mortgage
May 7, 2020 | Posted by: Jeffrey Kioussis
Through A Lenders Eyes
How will lenders look at my application and what factors play a role in my application?
As you may know there are three primary mortgage market that provide property financing. Each market has different criteria. Our primary lenders, also known as “A Lenders” include banks, trust companies and other monoline lenders. They tend to offer best rates and products for mortgages and have the highest qualification standards in our market place. “B lenders” known as alternative lenders have more flexibility and risk tolerance. They are also more understanding to situations and background information when making their decisions. Still competitive when it comes to rates but fit niche product criteria. Private lenders deal with each mortgage on a case by case basis. They have their own set of criteria for qualification and are more flexible to an individual’s needs. It is important to remember that these are basic outlines and of course can have some flexibility or have other options available. It is important to speak to a mortgage professional to help distinguish where your application should go.
Now, how do my lenders look at my application. Well they are different from lender to lender of course. The general rule of thumb is a lender will examine the 5 C’s of borrowing which are credit, character, capacity, collateral and capital.
We will work through each of the items above and give you a breakdown of each are used by types of lenders.
A detailed credit report must be provided to any lender. This must be obtained by your mortgage professional and once again by your lender. What is being looked at here would be if you have had difficulty meeting payments in the past? Are you at your credit limits and do you pay them in full each month? Length of your credit history also plays a role.
“A lenders” generally are looking at a minimum credit score of 1 applicant to be 650 or higher. “B lenders “are looking for 550 or higher and private lenders have no real bottom for your credit score. If there are any points of questions or concern that you are aware of on your report it’s always good to have to have them explained prior to submitting an application. Things such as loss of a job, divorce or separation or helping to support an elderly or ill friend or family member can all be explained. Your repayment history and responsibility level are outlined on your credit report which give a good insight into your character and spending habits or an explanation of where things went wrong.
Lenders are of course concerned on if the loan can be repaid. The main concern is can you afford the payments as well as the rest of your living and credit expenses. This is where your income plays the biggest role of course. Lenders utilize ratios such as GDS (Gross Debt Service Ratio) & TDS (Total Debt Service Ratio) to calculate affordability. Consult with your mortgage professional to help you with finding out what your GDS & TDS are. “A lenders” are looking for a maximum GDS ratio 32%-39% and TDS ratio of 40%-44%. The range is dependant of other factors such as credit, types of debts and collateral. “B lenders” are looking for a maximum GDS of 45%-50% and TDS of 55%...again have different factors involved that determine the maximum. Private lenders have their own preferences which are dictated by circumstances. In the case of equity loans, they are completely irrelevant.
This is thought of as security for repayment of the loan to the lender. Collateral is used in secured financing such as a mortgage to help mitigate the risk factor to the lender. Lenders would like to know the marketability of the property in the event of default (appraisal). It could also be additional assets you have or a co-signer can be considered as part of the collateral. There is no guideline for the various markets as to weight of collateral and how it is measured.
This is your net worth which is your assets minus your liabilities. LTV or loan-to-value ratio’s an important part of your net worth. Your down-payment or acquired equity lets a lender know how much “skin in the game” you have. This will also be important to help your lender distinguish if you will have access to funds should you incur any unforeseen circumstances.
Items such as savings, equity, assets and investments allow a bigger picture of finances to a lender. Default insurance helps to mitigate risk as well which will entitle you to lower rates as well and make your financing easier. In the “A market”, you are looking at a minimum of 5% minimum equity in your property. “B market” requires a minimum of 20% equity in your property. Private market requires a minimum of 5%-10% equity in your property.
Lenders want to know that as a borrower, you are trustworthy and will meet your obligations to them. Lenders will take factors such as length of employment or how long your business has been operating, your tendency to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their loan.
There you have it, you have a pretty good understanding how a lender will examine and review your application. Not all of the 5 c’s need to be perfect in alignment to obtain a mortgage. Your mortgage professional will put the proper emphasis on the proper field to best serve you. Every lenders will put focus and emphasis on different parts and in different measures but you should have an idea of where you are aiming to target.