There are six basic factors that lenders look for when underwriting a loan. Now, all the underwriter is trying to do is determine the risk factor involved in loaning you money. Are you a low-risk, a high-risk or anything in between. The higher the risk translates to a higher interest rate. The six basic qualifying requirements used to determine risk, and as a result your interest rate are listed below:
1. Employment- The most important factor here is a stable employment history. Two years of employment with the same employer is not required but is preferred. If you have not been working at a specific job for the last two years they look for the number of years in that field. Basically do you have a steady job giving you steady income?
2. Loan to Value (LTV)- This is the sales price vs. the amount of money borrowed. On a refinance it would be the appraised value vs. the amount of money borrowed. This would be determined by how much you would “put down” for the property or how much equity you have in the property you are refinancing. For example, if you were to put a $10,000 down payment for a $100,000 property, this would be a 90 down payment. NOTE: answer to the question I am asked frequently… “What if the appraised value is greater than the sales price, can I use that to get a better rate.” Unfortunately not, the underwriter will take the sales price or appraised value, whichever is lower. This guideline is applied universally by all lenders. So if you purchase a property that is way below appraised value you just got a good deal and will have a good pay day when you sell or refinance. The lower the LTV, the lower the risk and as a result the lower the interest rate. NOTE: 100 ($500 / $5,000 = 10). Your new Debt to Income Ratio including your new mortgage payment is 50%. This is really not that complex and is done to see if you make enough money to cover your current bills and your new mortgage payment. The higher the ratio, the greater the risk and as a result the higher the interest rate.
3. Credit Score- This is a number score that is assigned by the credit bureaus. If the other factors shown here are strong the credit score can be lower and you would still qualify. The main score considered is that of the primary borrowers. The lower the credit score, the greater the risk and as a result the higher the interest rate.
4. Reserves- This is how much money you have at your disposal. This could be savings, stocks, bonds, etc. The underwriter uses this to see how you handle your finances and to see if you can make it through one of life’s little bumps in the road. If reserves are used for your loan, a 30-60 day average of what you have in your bank accounts is usually used- some programs will just require you to show that you have the money to close and others will not ask for anything. If a large deposit is made in that 30-60 day period the underwriter would typically want to know where this money came from. Some people think the underwriter is trying to see if the money was reported on your taxes or gotten legally or is “looking into my personal life.” None of these are true. The underwriter simply wants to make sure that you did not obtain a new loan (more monthly debt) that has not show up on your credit yet and is not known about. The more the reserves, the lower the risk and as a result the lower the interest rate.
5. Payment Shock- This is the difference between your old and new monthly payment. If you are currently paying $800.00 a month and your new monthly payment is $4,000. This would be considerable payment shock. The greater the payment shock, the greater the risk and potentially a higher interest rate. Payment shock along with the other items listed here would be factored into your interest rate and be used to determine whether or not you actually qualify for the loan.
These six items viewed as a whole are what the underwriter uses to make a decision on your loan. You can be weak in some if you are strong in others. I.e. if you have a lower credit score, yet you are able to put some money down with a purchase. By increasing your strength in as many of these as possible you can make yourself better qualified for a lower interest rate on your mortgage.
http://www.amazines.com/article_detail.cfm/294578?articleid=294578
