Mortgage lenders carefully review your loan application to ensure that you have a high probability of making loan payments on time. They verify everything on your application and then have an underwriter review the verifications. They look for stable income, good credit, good cash reserves, equity and no excessive debts.
Your credit score is the first thing a lender looks at. While varying slightly from one lender to another, the minimum score required to qualify for a loan is around 720. This number has been rising since before the 2008 mortgage crisis when 620 was considered a good score and sub-prime lenders were approving loans with scores as low as 500. Some lenders will not approve anyone who has had a bankruptcy in the past, while others will consider a mortgage if the bankruptcy has been discharged at least two years. Lenders will also require a written explanation for any negative information in your report.
A steady, reliable and stable source of income is absolutely necessary. Lenders want to see pay stubs and W2s at a minimum and often want to see two years of federal tax returns and at least two months of bank statements. They mail a "verification of employment" to your employer to determine how long you have been with the company. Lenders also look for any negative employer comments and information regarding the probability of continued employment. If you are self-employed, they will want two years personal and business tax returns and bank statements, along with a recent profit and loss statement.
Debt ratio is determined by dividing your monthly debts by your monthly before-tax income. The lender will calculate two ratios. The "primary ratio" adds all of your proposed debts related to the property including the principal and interest payment for the mortgage as well as property taxes, homeowner's insurance and homeowner association dues, if applicable. The preferred primary ratio is 28. The "secondary ratio" adds your housing debts to any fixed expenses such as instalment payments (including auto loans) and minimum payments on credit cards and divides this total by your income. The preferred secondary debt ratio is 36. Lenders will approve higher ratios if there are compensating factors. These include things like time on your current job and high cash reserves.
Loan to Value Ratio
The loan to value ratio (LTV) is determined by dividing the requested loan amount by the appraised value of the home. Lenders prefer LTVs of 80 per cent or less. Some conventional loan programs allow LTVs of 90 per cent for refinances and 95 per cent for purchases. FHA and VA loans allow higher LTVs.
Liquid assets are cash reserves that consist of cash in the bank and other assets that have a predictable cash value. A minimum of two months' payments for all of your fixed debts is usually required. If the loan is for a purchase, reserves are determined after subtracting the down payment. For example, if all your monthly debts, including the proposed new mortgage, total £1,950, you will need liquid assets of £3,900. If the purchase price is £65,000, and you are making a down payment of 20 per cent , you will need liquid assets totalling £13,000 for the down payment plus an additional £3,900 for cash reserves. Lenders send out "verifications of deposit" to verify that the funds have been in your possession for a minimum period -- usually two to three months.