If you’re buying a home in Tampa Bay, whether it’s going to be a condo in Apollo Beach, a luxury home in Odessa, or a golf course home in Largo, you need to know which factors lenders consider when they’re deciding whether to extend you credit. That way, you’ll be extremely prepared when it’s time to get your preapproval letter.
What Lenders Consider in Mortgage Applications
When a lender gives you money, their main question is this:
“Can this person repay the loan according to the standard terms we set?”
For the most part, that’s all they care to know. Lenders use a number of factors to determine whether you’re likely to pay them back, including:
- Your credit score. The banks will comb through your credit report (you’re entitled to one free copy of your credit report each year – and they truly are free if you request them through the USA.gov website). They view a low score as a high risk; conversely, they see a high score as a low risk. The higher your credit score, the more likely the bank is to lend to you on favorable terms.
- Your debt-to-income ratio. Lenders consider how much you owe versus how much money you bring in to determine whether you’re likely to be able to repay them. If you owe a significant part of your monthly income to other creditors, lenders will be a little leery of giving you a large amount.
- Whether your monthly mortgage payment will be more or less than 28 percent of your gross monthly income. Lenders want your mortgage payment to be 28 percent or less of your gross monthly income (the amount of money you make each month, before taxes). You can figure out what payment would work for you by multiplying your monthly gross income by 0.28.
Here’s an example:
If you make $3,000 per month before taxes, multiply that by 0.28. You’ll get $840. That means at your current salary, the banks will consider an $840 per month mortgage payment to be affordable for you.
Naturally, the amount of your monthly mortgage payment will depend on your interest rates and the total cost of the home you’re trying to purchase.
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