How Do Lenders Determine How Much They’ll Loan You?
When you begin to consider purchasing a home, the first things you should do is go to a lender to get pre-approved. Many people wait until after they’ve found the home they want before they do this; this usually ends up in disappointment. Had they figured out if they could get a mortgage to begin with, and if so, for how much, they could have avoided a lot of the upset.
This way, you’ll know if you can get approved, and you’ll know whats in your budget. This will help you not only with your realtor, but with yourself when you perform online searches alone. Just about all of the sites have an option for you to select your max budget. This is useful, because it prevents many homebuyers from falling in love with a house out of their price range; thus, it prevents “daydreaming.” When you go to the bank, they will evaluate how much they are willing to let you borrow by looking at what are known as the “3 c’s,” or, credit, capacity, and collateral.
FICO: The first thing the bank will do is check your credit score. Generally, they use the FICO model. This model is a combination of your Equifax, Experian, and TransUnion scores. The common FICO score needed these days to get approved for a loan is between 740-760 (or higher). This report will show:
•Your outstanding debt
•How much debt you have outstanding as a percentage of open credit accounts
•How much debt you have in the different types of credit accounts (credit cards, car loans, school loans, etc.)
•Your payment history
Income: If the lender likes what he sees on the credit report, he will next evaluate your capacity, which is on the lender’s allowed maximum percentage debt to your gross income, less all of your other debt payments, how much do you have available for a housing payment?
Collateral: Lastly, you’ll need collateral. For collateral, you will pay the bank, who will then order an independent appraiser to determine a market value of the property; the bank will then lend you up to a certain percentage of that value, which depends on the bank and the loan program in which you qualify.