Tuesday, November 16, 2010

Apply for a Home Loan: The Ideal Mortgage Loan Profile

When applying for a home loan, you ideally want to get the lowest rate and best terms possible.  When the bank or a mortgage broker is taking your application, there are 4 main areas that are points of interest:

1. FICO Credit Score: Your credit score is indicative of your current liabilities, past payment performance, and public record (including bankruptcies).  The higher the score, the better you qualify as it demonstrates trustworthiness to the lender.  Ideally, you want a score of 740 or higher.

2. Income: The amount you make on a monthly basis is a baseline for how big of a loan you qualify for.  Ideally, your PITI (principal-income-taxes-insurance) mortgage payment should be no larger than 30% of your pre-tax income.  Additionally, your total liabilities (credit card minimum payments, car payments, etc) and your mortgage payment should not exceed 50% of your pre-tax income.  This is known as the Debt to Income (DTI) ratio.  The lower your DTI, the better.

3. Assets: Lenders want to see that you have at least 3 months of mortgage payments in the bank in case of an emergency.  Ideally, you want to have at least 6 months of reserves.  The more cash you have, the better.  Other properties, retirement funds, stock portfolios, etc. contribute to your assets. 

4. Loan to Value (LTV) Ratio: The lower your LTV, the better.  Your loan to value ratio is the ratio of the size of the loan compared to the appraised value of the home.  For example, if your loan is for $400k, and the home is worth $500k, the LTV ratio is 80%.  Ideally, you want at most 80% LTV; you can achieve this by putting a down payment on the home.  The lower the LTV, the less risk the lender has when loaning you the money. 

If you are strong in these 4 areas, you should have no problem qualifying for a mortgage with low rates and excellent terms.