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  • Purchasing a home is a HUGE deal. Preparing for that purchase is just as huge, especially for first-time homebuyers. Below is a list of criteria lenders look at and what you can do to be prepared to obtain a loan in the most efficient, cost-effective way.

  • 5 Criteria Lenders Consider

    Credit history

    While this one may seem obvious, you may be surprised at the number of buyers who think their credit is good (it isn't) or think their credit is bad (it isn't). These days it is super easy to obtain a credit score for free (although one caveat: mortgage lenders use the middle of THREE scores (called a tri-merge) and the models used are not the same is for things like credit cards or other consumer debt). It is imperative you review your credit report either prior to contacting a lender or give the lender your written consent to pull your report and they can go over it with you. It is crucial to maintain making your payments through the mortgage process. Most do not repull your score at funding but they DO pull a supplemental report (referred to as a "soft pull") and ensure you have not been delinquent. If you have, it will seriously derail the entire transaction. Not to worry, a soft pull does not impact your credit score. 

    Monthly debt

    Your debt-to-income ratio, or DTI, plays a large role in whether you’re ready and able to qualify for a mortgage. It’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow. DTI is as important as your credit score and job stability, if not more so.

    Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pretax, or gross, income. Most lenders look for a ratio of 36% or less, though there are exceptions. 

    DTI sometimes leaves out monthly expenses such as food, utilities, transportation costs and health insurance, among others; lenders may not consider these expenses and may approve you to borrow more than you’re comfortable paying. So keep these additional obligations in mind as you evaluate how much you’re willing to pay each month. You’ll want the lowest DTI possible not just to qualify with the best lender and buy the home you want, but also to ensure you’re able to pay your debts and live comfortably at the same time.

    Income

    Income calculations are commonly misunderstood, even by real estate professionals. Investors are looking for consistency in income, generally with the same employer for 2 years or more. This applies to full time employment or self-employed borrowers. Generally the guidelines are more restrictive for part-time employment. It is also permissible if you've switched jobs in the past 2 years, as long as the line of work is consistent and there are no significant gaps. As always, exceptions arise all the time, so it is best to go over your situation with a loan consultant. FNMA guidelines are fairly black and white when considering what income qualifies and how to calculate it so most lenders should be consistent. 

    Assets

    Another key aspect of a mortgage is where your down payment is coming from. Typical sources are checking/savings, retirement accounts and gift funds from eligible sources. Acceptable forms of down payment vary from program to program so make sure you ask your loan consultant if your sources are eligible for the program you are using. Some programs also require reserves (meaning funds left over after the transaction closes). These requirements are in place to ensure you have X number of months of payments in reserve in case you need it. It is simply an extra layer of protection for the lender. 

    Collateral

    Contrary to popular belief, simply having equity in a property is not enough to make it "lend-able." Lenders DO NOT want your property back. They are not in the property buying and selling business. So lenders want to ensure the property is safe and marketable, and of course that the value is there. They also don't want to lend on a property that needs extensive repairs. In addition, a lender will review the title history of the property to make sure the title is "clean" meaning there are no liens that aren't expected and no clouds in title. If you are in search of a "fixer-upper" you may have problems getting that financed through conventional methods. Luckily there's a product for that!

DO YOU NEED A FAST CLOSING?

At Sundial Capital, we understand time is money. That is why we use our efficient process to close the average loan in 14 days. Check to see if you qualify now!