Just as you would be cautious about lending a significant amount of money to someone, lenders evaluate potential borrowers with a similar scrutiny. If you were about to lend $200,000 to someone, you would want to ensure they can pay you back, right? Lenders follow a similar logic. As you embark on the journey of purchasing a house in Colorado Springs, understanding how you’ll be assessed can provide a significant advantage. Let’s dive into the four fundamental criteria lenders look at.
(LTV) Loan to Value
LTV is a simple percentage of how much you want to finance versus the value of the house. For example, if you want to buy a 200,000 dollar house and want to put down 3.5% ($7,000), then you would be financing 96.5% of the value of the house.
Credit tells the lender if you have paid people back when you’ve used credit before. They look at your credit score and your payment histories on each trade-line. They also look for any bankruptcies, foreclosures, judgments, and collections. These may not exclude you from buying a house, but they will just factor into the final decision depending on the loan product you choose.
(DTI) Debt to Income ratio
DTI is a simple percentage calculated by the amount of monthly bills that you have on your credit report compared to your monthly gross income each month. So if you have $2500 dollars in bills each month and you show $5000 dollars of income each month, then you are at a 50% debt to income ratio. Most home loan programs would like to see you at 50% or lower.
Reserves show the lender that you can save some money for those unexpected hard times that everyone goes though at some point. If you have 1-2 months of money saved up, then you will be more prepared to make a house payment even if you lose your job for a month or two. Most programs don’t require any reserves, but the more you have, the stronger your loan application will be.
While the loan programs in Colorado Springs come with detailed guidelines for underwriters, the above four criteria serve as the starting point. As a prospective home buyer, equipping yourself with this knowledge amplifies your chances of loan approval and ensures you select the right loan tailored to your needs.
Need Expert Guidance? Reach out to Fidelity Mortgage Solutions for a complimentary assessment of your financial situation. We’re here to connect you with the ideal loan product.
What Are Lenders Looking For To Qualify Someone For A Home Loan FAQs
Lenders consider various factors, including credit score, income stability, employment history, debt-to-income ratio, down payment amount, and the borrower’s ability to repay the loan.
The minimum credit score requirement can vary among lenders and loan types. However, a credit score of around 620 or higher is often considered the minimum to be eligible for a conventional home loan. Some government-backed loans may accept lower credit scores.
Lenders assess a borrower’s income to determine their ability to repay the loan. They generally prefer stable and verifiable income sources, such as regular employment, self-employment income, or other documented sources of earnings.
The debt-to-income ratio measures the percentage of a borrower’s monthly income that goes towards paying debts. Lenders typically prefer a DTI ratio below 43%, although some loan programs may allow higher ratios in certain situations.
The down payment is a crucial factor in loan qualification. Generally, a larger down payment demonstrates a borrower’s financial stability and commitment to the purchase. While there are loans available with low down payment options, a higher down payment can improve the borrower’s chances of loan approval and may even lead to more favorable terms.