| There are six basic factors that lenders look for when | | | | monthly debt you already have, that would be $2,500 |
| underwriting a loan. Now, all the underwriter is trying to | | | | in monthly debt. You now do the math for the debts |
| do is determine the risk factor involved in loaning you | | | | divided by income ($2,500 / $5,000 = 50%). Your new |
| money. Are you a low-risk, a high-risk or anything in | | | | Debt to Income Ratio including your new mortgage |
| between. The higher the risk translates to a higher | | | | payment is 50%. This is really not that complex and is |
| interest rate. The six basic qualifying requirements | | | | done to see if you make enough money to cover your |
| used to determine risk, and as a result your interest | | | | current bills and your new mortgage payment. The |
| rate are listed below: | | | | higher the ratio, the greater the risk and as a result the |
| | | | higher the interest rate. |
| 1. Employment- The most important factor here is a | | | | 4. Credit Score- This is a number score that is |
| stable employment history. Two years of employment | | | | assigned by the credit bureaus. If the other factors |
| with the same employer is not required but is | | | | shown here are strong the credit score can be lower |
| preferred. If you have not been working at a specific | | | | and you would still qualify. The main score considered |
| job for the last two years they look for the number of | | | | is that of the primary borrowers. The lower the credit |
| years in that field. Basically do you have a steady job | | | | score, the greater the risk and as a result the higher |
| giving you steady income? | | | | the interest rate. |
| 2. Loan to Value (LTV)- This is the sales price vs. the | | | | 5. Reserves- This is how much money you have at |
| amount of money borrowed. On a refinance it would | | | | your disposal. This could be savings, stocks, bonds, etc. |
| be the appraised value vs. the amount of money | | | | The underwriter uses this to see how you handle your |
| borrowed. This would be determined by how much | | | | finances and to see if you can make it through one of |
| you would "put down" or the property or how much | | | | life's little bumps in the road. If reserves are used for |
| equity you have in the property you are refinancing. | | | | your loan, a 30-60 day average of what you have in |
| For example, if you were to put a $10,000 down | | | | your bank accounts is usually used- some programs |
| payment for a $100,000 property, this would be a 90% | | | | will just require you to show that you have the money |
| LTV because you made a 10% down payment. | | | | to close and others will not ask for anything. If a large |
| NOTE: answer to the question I am asked frequently... | | | | deposit is made in that 30-60 day period the |
| "What if the appraised value is greater than the sales | | | | underwriter would typically want to know where this |
| price, can I use that to get a better rate." Unfortunately | | | | money came from. Some people think the underwriter |
| not, the underwriter will take the sales price or | | | | is trying to see if the money was reported on your |
| appraised value, whichever is lower. This guideline is | | | | taxes or gotten legally or is "looking into my personal |
| applied universally by all lenders. So if you purchase a | | | | life." None of these are true. The underwriter simply |
| property that is way below appraised value you just | | | | wants to make sure that you did not obtain a new |
| got a good deal and will have a good pay day when | | | | loan (more monthly debt) that has not show up on |
| you sell or refinance. The lower the LTV, the lower the | | | | your credit yet and is not known about. The more the |
| risk and as a result the lower the interest rate. NOTE: | | | | reserves, the lower the risk and as a result the lower |
| 100% financing is available. | | | | the interest rate. |
| 3. Debt to Income (DTI)- This is your debt divided by | | | | 6. Payment Shock- This is the difference between |
| how much you earn (before taxes) per month. If you | | | | your old and new monthly payment. If you are |
| have debts of $500 a month and income of $5,000 | | | | currently paying $800.00 a month and your new |
| your DTI would be 10% ($500 / $5,000 = 10%). Your | | | | monthly payment is $4,000. This would be considerable |
| new mortgage payment including taxes and insurance | | | | payment shock. The greater the payment shock, the |
| would be added to the debts to see what your Debt | | | | greater the risk and potentially a higher interest rate. |
| to Income Ratio would be including your new debt- | | | | Payment shock along with the other items listed here |
| your new mortgage payment. For example if your | | | | would be factored into your interest rate and be used |
| new payment, PITI- that stands for Principal, Interest, | | | | to determine whether or not you actually qualify for |
| Taxes and Insurance, is $2,000 a month. Using the | | | | the loan. |
| above example, add that $2,000 to the $500 of | | | | |