Home Mortgage: What is most important
Mortgages are becoming harder to get
Home Mortgages are becoming few and far between mainly due to the changes that have taken place over the past few years in the industry.
There are several factors that go into a home mortgage that potential borrowers should be aware of before applying for a home mortgage, but credit is perhaps the most important.
What a credit report will tell the bank
A Credit report is pulled with each application for a home mortgage. The credit report shows current obligations, determines the borrowers ability to pay and shows their willingness to pay. For the current obligations, the credit reports shows just about every payment except utilities. Auto loans, credit cards, student loans, mortgages, collections, etc, all show up and are detailed as to how much a borrower owns in total as well as monthly. Next the credit report will determine the borrowers ability to pay. For this, bankers and brokers use what is called Debt to Income or DTI. DTI represents a ratio of what the borrower makes on a monthly basis, as compared to what they spend on a monthly basis as represented on the credit report.
As mentioned, not everything is reported, such as utilities, food, clothing etc, so taking those items into account, the DTI ratio needs to be no higher than 45%, including the upcoming mortgage payment. Finally the willingness of the borrower to repay the loan is taken into account. This can often be one of the factors that is overlooked. Many borrowers are honest and good people. They would not walk away from owing any person or any company without satisfying the debt. Even if it meant having to pay them over a longer period of time.
Unfortunately most banks do not see it that way. Banks look at risk factors of borrowers, and a credit report that shows collection accounts, past due payments, or closed accounts, sends a warning to the bank that this borrower either does not have the steady income reported to continuously make payments, or is willing to drop the creditor in tough times. Furthermore, and it might be argued as compassion, a bank may look at a borrower and realize that they are getting in over their head. They may look at the file and fee that while the borrower could make the payment today; one small change financially to the borrower and like a house of cards, they could completely collapse sending them into bankruptcy, in which everyone looses.
In the end, the credit report is the most important thing a bank looks at in determining approval of a home loan and borrowers should do all they can to make sure that their credit is in good standing.