Ever Wonder How Lenders Decide How Much To Loan? Here Is How They Calculate The Amount They’ll Approve You For a Loan


How Do Lenders Determine How Much They’ll Loan You?

Considering purchasing a house? First off, congratulations. Buying a home is a huge milestone, and one of the largest (if not the largest) investment you’ll ever make. When you begin to consider purchasing a home, the first thing you should do is visit a lender to get approved for a mortgage.

Unfortunately, many people do this process backwards, and wait until they find a house they like before applying for a loan. This is the wrong way to do it, because you risk losing that house. It takes time to get a mortgage, even if you’re a solid candidate that will likely be approved.

While you’re waiting to get approved, other buyers who already have their pre-approval letter could be making offers. The seller isn’t going to wait on someone when they already have offers coming in from people who they know are sure-bets. Despite the fact, that you may get approved, but find out too late that you didn’t get approved for enough to buy that specific house.

Once you know how much you can get approved for, your realtor can narrow down homes based on your budget. You don’t want to waste both of your times by looking at homes that you can’t afford, only to find out later that you can’t.

Most home buying sites have check boxes where you can write your max budget. This will eliminate you from falling in love with homes that you can’t afford. So…how do lenders decide how much they’ll loan you? Lenders decide how much they’ll let you borrow by following your credit, collateral, and your capacity. Also known as the “Three C’s.” First
off, the bank uses a combination of the three credit bureau scores (Equifax, Experian, and Transunion) to create one overall credit score.

This model is the most accurate prediction of your score over using one specific bureau. Your FICO score shows the bank a couple things. The amount of your outstanding debt (if any), how much debt you have compared to your credit limit(s), how much debt you have across different credit mixes (auto loans, school loans, or credit card debt), as well as your payment history.

The bank also looks at your income. If the lender likes what they see so far up to this point, then they’ll decide how much they’ll give you. They usually base this on their allowed maximum percentage to your overall incomeminus all of your debt owed. Then, they’ll calculate how much you’ll have leftover after all of that to see what you really can afford.

The last thing they’ll assess is your collateral. If you default on the loan, do you have anything that the bank could take to compensate them for the loss? If you have some sort of collateral, and your credit isn’t all that great, the collateral alone could help you get the loan, depending on how much the collateral you have is worth.

Readers Comments (1)

  1. No matter how much the bank approves your loan for, never use the whole loan amount to buy a house. Usually, the bank overestimates and gives you a little more than you actually can afford. Don’t assume that the loan amount they give you is what you definitely can afford. You are responsible for checking your own finances to see how much house you’re really able to buy.

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