Mortgage lenders are in business to make money. Lenders make money by loaning money; whether or not they lend to you as a homeowner depends on the risk they are willing to take by giving you a mortgage loan. Because of this your mortgage lender may require you to meet certain criteria in order to qualify for your loan. This criteria includes your past credit history, your income, current debt ratio, and the collateral used to secure the loan. Factors like employment history are becoming less important to secure a mortgage; in recent years working at the same job for 10 or 15 years helped your credit worthiness. Today credit scores rely more and more on your repayment history.
Don’t take this the wrong way, an excellent credit history will help you secure a lower interest rate and get you a loan with better terms. However, with mortgage interest rates at historically low levels, many sub-prime lenders are offering bad credit mortgage loans with very competitive interest rates.
Another important factor is your income. Your income is used to calculate a debt-to-income ratio. This factors in your total debt picture: car loans, credit cards, student loans, every current debt in your credit report. This helps the lender determine your ability to make your monthly payments. Homeowners with low debt-to-income ratios represent much less risk than those who are in debt up to their eyeballs.
You can easily calculate your own debt-to-income ratio using your credit report. When you look at your credit you’ll find three columns: high credit, balance, and the minimum payment amount. High credit represents the credit limits on your credit cards or the original amount you borrowed on your loans. Current balance as the name implies is the balance that you owe; the minimum payment is the amount required by each lender in payment every month. Using this information from your credit report you can calculate the ratio of your debts to your monthly income.
To learn more about assessing your risk to a lender and credit-worthiness, sign up for a free guide to mortgages and mortgage refinancing: “Five Things You Need to Know Before Refinancing a Mortgage.”