WHAT DO POTENTIAL MORTGAGE LENDERS USE TO MAKE A DECISION?
Based on the following factors, your lender will determine how much buying power you’ll have. Remember, you are now at their mercy (though you certainly can shop around):
Credit score. Pretty much every loan eligibility matrix starts with a credit score. So, if your credit score is outside the range allowed by the program, no amount of compensating factors can get you into it. If your credit’s just barely in range, you may be able to buy, but with a much smaller loan than you might expect with your income.
Down payment. A downpayment can make a big difference to how much you can borrow, since your lender likes to see that you have some skin in the game. Most of the popular loan programs will allow you to bring a downpayment as small as three to five percent of the loan total, but if you can produce 10 or even 20 percent, lenders may overlook some blemishes in other areas.
Additional cash reserves. In some cases, you may be asked to provide reserve funds, to be verified prior to closing. These funds sort of act like a security blanket for the bank, so they worry less about you defaulting on your obligation. It’s common to ask for reserves for certain programs, if you’re considering buying another house before your current home is sold, or if you’re buying a second home. It’s not very often that first time home buyers are asked for reserves, but it does happen.
Income information. Ultimately, the total amount you can borrow is based on your income and how well you can support the payment. Always disclose all the income you have, even if you think your weekend lemonade stand doesn’t really count as real income.
Debt-to-income ratio. From the income and debt you disclose and that the bank discovers, they’ll produce a figure called your debt-to-income ratio. Based on this number and the mortgage program you use, along with your downpayment and credit score, they’ll ultimately figure out just how much they’re willing to lend.