The most important elements that are evaluated are; credit history, income, net
worth and collateral evaluation. One other possibility is the relationship you
have with the bank itself through the business you’ve done with them in the
past. The relationship you have developed with the bank will have some
influence however before elements listed above can make or break a home
mortgage loan deal.
Credit history is something that everybody
hears about and if you really understand. And somebody says the term good
credit or bad credit; I wonder if they really understand what they’re talking
about. Information regarding how credit is calculated and interpreted is not as
accessible as should be. Credit reporting agencies argue they can’t fully
divulge how they calculate the credit score because it??s a proprietary secret.
Regardless, it still comes down to the same thing: the better your credit match
is the lender’s idea of good credit the easier it will be for you to qualify.
So do your homework and find out what the bank considers good credit because it
often means more than just the credit score.
Income verification and evaluation is
another area that can help you or knocked out of the running. Like evaluating
credit it can be different according to the bank you’re applying to. Generally
speaking, if you have two years of employment history at the same company
within the same job category and you make salary, you will look past the first
screen. The second screen is how much money you make and more specifically, how
much money you make in comparison to how much your expenses are each month (and
will be if you buy that new home). Any lender in their right mind will lend a
home mortgage to someone who can’t afford to pay it. Many lenders use a
debt-to-income ratio, it is easy to calculate. Add up all your payments that
you make to any existing debt and also any payments you will have once you own
the home.? Include property tax,
utilities (an estimate), and things of that nature. You don’t have to include
your gym membership or how much you spend and go to the movies each month, the
banks looking at fixed expenses.? Once
you have that number and divide your gross monthly income into the expense
number you just calculated. Just to clarify, gross income is before deductions;
multiply that number by a hundred to give you a percentage. You should have
your debt-to-income ratio, if it’s under 35% you’re really good shape, if it’s
35% to 45% you should be good to go. If it’s over 45% you should work on it by
reducing that you may have a free up more income.
Net worth is another important part of
qualifying. It’s not as important as credit or income but it can position you
to negotiate a better deal. Net worth is calculation of all your assets minus
your liabilities.? Assets are considered
by the lender are things like, investments (stocks, bonds, mutual funds, IRAs),
life insurance policies with cash value, any property you own (land, existing
home, cottage) and in some cases vehicles (including boats, motorcycles etc.).
This is something that you want to find out so consider doing your homework
before you apply. Knowing what the lender considers to be assets in calculating
your net worth will make you better prepared before you go to apply.
Collateral evaluation or more commonly
known as the appraisal is another very important piece of the puzzle. Most
lenders use their own appraisers or appraisal services, to evaluate the home.
Waiting for the appraisal to come back cause some borrowers to worry and start
biting their nails. It’s important to set the right expectation because this is
where people become frustrated. The appraisal price of a home is often
different than the real estate price of a home. The appraiser does take into
consideration what homes are being sold for in the area however they make
adjustments based on the differences between the house that’s being appraised
and the house that’s sold. Less obvious things can affect an appraisal like
what type of heating the home has, if there is a water purifier attached to the
water supply for the house, skylights, and much more. Suffice it to say, two
houses may look the same but not appraised the same. This can work in your
favor as the appraiser may uncover something you were not aware of. The bank
can still pre-approved you for mortgage and you can simply shop for another
house.
This gives you a general idea what to
expect with home equity loan requirements. It wasn’t meant to cover all of the
details just to give you a general idea. Use the Internet and other sources to
continue to do your research to best prepare. ?