The More Mortgage Loans Change…

…the more they stay the same.

Mortgage bankers in Florida need to keep up with all the industry changes (for more information please see just about any of my previous posts to see the progression of adjustments to our industry!), but the basics of lending are still very much alive and kicking. So if a consumer ever asks me what lenders look at to approve someone, I give them my patented spiel about the four pillars of underwriting.

The pillars (as I call them) are also known as the Four C’s of Underwriting; these guidelines are the foundation of the underwriters’ approval process:

CAPACITY – This is the analysis that compares a borrower’s income to their proposed debt. And based on that status, an underwriter will consider the borrower’s ability to repay the mortgage.

  • Known as your Housing Ratio, your mortgage lender will review the percentage of your proposed total mortgage payment which includes: principal & interest, real estate taxes, and homeowner’s insurance (PITI), and divide that by your monthly, pre-tax income.
  • A Housing Ratio of 28% or less would put you in the zone, but your “back end ratio” also comes into play. This Debt Ratio relates your new mortgage to your current debt load; 45% or less is considered a decent one.

But again, every single application is as different as the person applying; extenuating circumstances and atypical situations also factor into your creditworthiness.

CREDIT – The calculation of the likelihood you’ll make your payments based on how well you’ve done it in the past and how much debt you have outstanding in relation to your credit limits. The credit score result goes a long way toward the mortgage rate you will ultimately be granted.

CASH – Basically you can be walking a fine line here…you need that skin in the game (decent down payment), to make you a serious contender; but not at the risk of having cleaned out your cash reserves. Since there are many considerations surrounding the source of your monies (gift, year-end bonus, etc.) you’ll need to be prepared to show the appropriate documentation as to how you have the money you have.

COLLATERAL – This piece of the puzzle is the only one that directly takes what you are buying into account. The appraisal, the sales of the comparable homes in the area, as well as the amenities all add up to the lender’s sense of security about the property in the event you default.

At the end of the day, you’re at the mercy of a laundry list of factors that can cause your mortgage loan to get approved or denied at a particular point in time. But if you come clean with the good, the bad, and the ugly of your credit history (and take any necessary steps to fix the stuff that’s broken); you are more likely on the road to home ownership.

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