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.

Debt Consolidation

If you have credit cards, you may see debt consolidation offers right and left.  These debt consolidation offers usually involve you moving all of your credit card debt to a new or existing credit card so that you have one balance.  Additionally, doing this debt consolidation may qualify you for an introductory low APR, which is designed to be lower than the APR's of your other cards.

Be careful if you are considering this.  Many times, these low introductory APR's have strict conditions and small windows of benefit.  It's common for the introductory APR to be around 2% and then jump up to 20% without any advance notice.  If you're going to do a debt consolidation on a credit card, be wary of the potential consequences if you don't watch your account closely enough.

Unsecured Loans

Contrary to secured loans, unsecured loans do not have collateral to secure the loan amount.  Unsecured loans are considered higher risk because of the borrower defaults on the loan, the lender can only send the account to collections and not be able to seize any property to recoup the losses.

The credit card is the most common example of the unsecured loan.  Unsecured loans are primarily underwritten with credit score, credit history, and income level as criteria to qualify.  Unsecured loans are different from secured loans because the higher risk in an unsecured loan usually means a high interest rate, usually 20% and up.

Secured Loans

A secured loan is a type of loan in which the borrower puts up some form of collateral, such as a car or house, or secure the loan.  In case of a default, the lender can retrieve his/her losses by taking possession of the asset and selling it off.  Examples of secured loans include mortgage loans and car loans.

Secured loans are associated with lower risks for the lender and a lower interest rate to the borrower.  From the lender's perspective, a default on the borrower's part will still lead to some sort of recouping of the original loan amount.  This is why a lender must underwrite these loans as a "no lose" situation for them.  From the borrower's perspective, the lower rates compared to an unsecured loan are better because that means lower payments.

Mortgage Loans

With mortgages in the USA being a hot topic over the last few years, I wanted to know if any of you have a mortgage?  When did you get it, and are you happy with your rate and terms?  Did you get your mortgage through a mortgage broker, direct lender, or your bank?

There are still a lot of people getting mortgage loans today, and I think this information would be interesting to display in the comments section.  If you do have a bad loan, perhaps others could share their experiences to help everyone out.

Payday Loan Scams

It's a trap!

Recently, more and more people have been turning to Payday Loans to get quick cash for an emergency.  As a result, more scams are popping up, and borrowers are experiencing the consequences.  If you do need to get payday loan, make sure you read all of the fine print so that you don't end up with a judgment or bad credit.

Some payday loan shops have been asking people to secure their loan with more than their paycheck; some have asked to use a car title or even a home's title as collateral.  If the borrower defaults on this loan (sometimes in as little as 2 weeks), the collateral becomes that of the lender.  Using your $10,000 car as collateral for a $500 loan is blasphemous.

The best way to avoid these scams is to just not use payday loans.  Have an emergency/savings fund for these circumstances as getting a payday loan just isn't worth it.

Your Credit Score and Credit History

For those of you reading this, are you aware of your credit score?  When was the last time you checked it?  And if you know your credit score, does it rate well?  For your age, do you think you have enough debt and credit history to establish a strong score?

I'd love to hear the responses of my readers so that I can cater my content to you.