5 Things lenders check besides your Credit Score
Credit Score isn’t the only thing that could make or break your ability to get a loan or line of credit. Many lenders – mortgage lenders, especially – will also calculate a potential borrower’s debt-to-income ratio to determine whether they’re suited to take on another monthly payment.
You can find your debt-to-income ratio through a simple calculation: Divide all monthly debt payments by gross monthly income and you have a ratio, or percentage.
A debt-to-income ratio of 36% or less is generally good for homeowners, while 15% to 20% is good for renters. The lower the percentage, the better you look to lenders, because it indicates your debts make up a smaller portion of your earnings.
Outside of your credit score, your debt-to-income ratio is the most important number for mortgage lenders. This ratio measures the relationship between your monthly debt obligations and your gross monthly income.
As a general rule, lenders strongly prefer your total monthly debts including your estimated new mortgage payment equal no more than 43% of your gross monthly income. If your debt-to-income rises past this level, lenders won’t be as willing to lend you mortgage money. They’ll worry that you’re already overburdened with debt, and the addition of a monthly mortgage payment will only make your financial situation worse.
Aside from your debt amount and your track record of paying your bills, more lenders are adding employment history to the credit checking criteria mix. Creditors may want to review your job history as a means of estimating income stability. A good employment track record says, two or more years at the same company indicates you are stable professionally, and thus a good credit risk. But if you’re employment history is of the job-hopping variety that could be a cause of concern for lenders, who may either deny you credit outright, or approve your credit application, but at a higher interest rate that helps the lender compensate for the added risk. In case they ask, be prepared to provide a reasonable explanation.
Personal income is also a burgeoning factor in loan and credit approvals. Much like employment history, where stability is rewarded with credit approvals and lower interest rates, a steady income indicates to creditors that you have the financial means necessary to cover your debt payments. Any “breaks in the chain” in the form of little or no income, and creditors could view you as a higher credit risk, and place your credit application in jeopardy.
Lenders increasingly want assurance that you could continue making your loan or credit payments even if you’re incapacitated or laid off. That’s where cash flow comes into the picture. If you run into a financial emergency, creditors want to know if you have any financial assets, like stocks, bonds, money market accounts, or certificates of deposit that can be used in the short-term to cover your debt in the event of a financial setback. In short, the more liquid assets you have, the more likely you’ll make your debt payments.
To qualify for the lowest interest rates, make sure you have enough money in savings. You’ll need money to pay for your down payment, closing costs, and a certain number of months’ worth of property taxes, of course.
But lenders often require that you also have enough in savings to pay at least two months of your new mortgage payment, including whatever you’re paying each month for property taxes and insurance. Lenders want to see that you have savings in case you suffer a temporary reduction in your monthly income. This way, you’ll be able to use your savings to pay for at least a couple months of mortgage payments.
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