• How Do Lenders Decide How Much to Lend? The Mortgage Loan Analyzer Decoded. Here’s How Banks Determine Your Borrowing Power


    How Lenders Determine Your Borrowing Ability 

    If you are thinking about buying a home, one of the first things you should do is go to a lender to get pre-approved. This will determine how much money you can borrow on a mortgage. This will also help you filter your home search by sale price, which will narrow your choices within your financing range. Lenders evaluate your borrowing ability by looking at credit, capacity, and collateral.


    Credit or FICO Score: The first item a lender will review is your credit profile, also known as your credit score or FICO score. This is where all the decisions you’ve made in the past regarding will be reflected, such as: how much debt you have outstanding, how much debt you have outstanding as a percentage of open credit accounts. See: Mortgage Affordability.

    It will also be reflected by viewing how much debt you have in the different types of credit accounts (credit cards, car loans, school loans, etc.), and how well you’ve paid your bills over the years. Lenders used to allow much lower credit scores for borrowing purposes, but they’ve gone up the past few years. The lower your score, the higher your interest rate and points on your mortgage loan. How Much Can I Borrow? – FICO Calculator.

    Capacity or Income: If you pass the FICO score test and the lender says you are creditworthy, the next item you will be evaluated for is capacity, which means that based on the lender’s allowed maximum percentage debt to your gross income, minus all of your other debt payments, how much do you have available for a housing payment? fico_breakdown

    Collateral or the Property: If you’ve got the credit, and the capacity, you only need one more piece and that’s the collateral. This is the easiest part. You will pay the bank and they will order an independent appraiser to determine a market value of the property.

    The bottom line, is that getting approved for a home loan can be tough. It isn’t always easy. Remember that you should always have plenty of money in two funds before you buy a house: an emergency fund, and your savings fund. You should dip into neither of these funds to come up with the downpayment for a house. You can likely get a mortgage loan without putting 20% down, but generally, if you don’t have 20% down to put on the home, you can’t afford it. Sometimes, it is smarter to wait until later to buy a house than to buy it when making ends meet will be strenuous. See: How Much Money Can I Borrow?

    Categories: General

    2 thoughts on “How Do Lenders Decide How Much to Lend? The Mortgage Loan Analyzer Decoded. Here’s How Banks Determine Your Borrowing Power

    • Rick says:

      I didn’t get approved for a loan on the house I really wanted. What can I do? Do I have any options?

    • Paul Morris says:

      A suggestion is to come up with a plan that covers all areas of your financial profile that will put you back on a path to owning a home. It’s understandable that you want to move quickly, but be patient. Most issues can be fixed, but understand that it will take some time. If, for example, you have a student loan that negatively impacts your credit score, it can take a while to correct or improve these aspects.

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