Credit ratings, ratios and how it affects a borrower
There are a variety of factors mortgage companies take into consideration
when deciding whether or not to lend money to any given borrower.
It is important to realize that not all lenders make every type of
loan. It is entirely possible to be turned down by one lender and
yet based upon the exact same information get approved for a loan
from a different lender. This is because some lenders place greater
weight on some information than on others. The primary considerations
for lenders are as follows;
- Credit history of the borrower
- Borrowers Debt Ratio
- Loan to Value
Credit History
A great deal if not all information about your credit is in large
part public knowledge, in the sense that it is available to potential
lenders with your written signature authorizing release of those records.
This information fall into three basic categories;
- Public records- this includes items such as bankruptcies, items
placed for collection by an agency, any civil or criminal judgments
- Consumer installment credit- this includes items such as car
loans, jewelry and department or specialty store accounts, student
loans
- Mortgage Credit- this is the historical record of repayment
on an existing or previous mortgage.
All of the above sources of information report late payments of
30 days or more to the primary credit bureaus. Those credit bureaus
are; Equifax, TRW, Trans Union and Experion. All of these agencies
and most mortgage lenders us a formula that is known in the financial
and lending industries as a FICO score.
FICO is simply an abbreviation for Fair Issac Company. That is
the name of the company that created a formula for evaluating a
borrowers financial history. Scores fall in a range of 375-900.
The average score is in the range of 620-650.
Debt Ratios
This is a measure that refers to a borrowers ability to repay a
mortgage or for that matter any loan. The lower a borrowers debt
ratio the higher his grade (A-D) will be. The reverse is also true,
the higher a borrowers debt ratio the lower the grad will be. The
mathematical formula can be stated as follows;
Mortgage payments+credit card or other debt / monthly income=ratio
Example - Husband and wife with 2 cars and only one credit card.
Their payments are as follows;
Car payment of $ 320.00 per month
Credit card payment of $ 180.00 per month
Mortgage payment of $1500.00 per month
--------------------------------------------------------------------------------
Total monthly payments $2000.00
Joint income for the couple is $7334.00 so the formula for their
debt ratio looks like this;
$2000/$7334 = 27.2%
Loan to Value or LTV
LTV refers to the ratio of the amount of the loan to sale price
or appraisal value of a property (whichever is the lesser). Mathematically
stated the formula looks like this;
Amount of loan / divided by selling price or appraised value =
ratio of loan to value
Example: Selling price of the home is $250,000,
the down payment is $47,500 and the appraisal was for $262,000 so
the formula looks like this;
$250,000 - $47,500 = $202,500 loan amount
$202,500 / $262,000 = 77.3%
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