photo credit: Stefano Mazzone

Most people realize that having good credit scores is vital for getting a mortgage loan approved, but this is not everything that the lender takes into consideration. There are several key factors that a mortgage lender looks at when determining whether or not to approve a loan and only part of this information is contained in a credit report. This is why most people applying for a mortgage are required to present much more documentation than the lender can obtain independently.

One of these aspects is found by calculating the debt to income ratio of the client. Basically, the debt to income ratio is a comparison of the applicants net income and his or her monthly debt payouts. The lender does this calculation to make sure they have not overlooked anything and requires income documentation in the form of check stubs and tax returns among other things. The perfect debt ratio is about 1.3; this means that the applicant has 30% more income than debts and expenses to pay every month.

Payment history is another important aspect of an applicants financial picture; lenders look for late payments on credit reports. On-time payments are very important to mortgage lenders. Payment history information is part of a credit report but lenders look closely because as part of the FICO score it is weighted differently than mortgage lenders weigh it. An applicants credit file is scrutinized closely to find out all there is to know about his or her payment habits. This goes far beyond looking at the credit score. Attaching a letter of explanation to a mortgage application would be helpful to a lender who is going to see several late payments.

Mortgage lenders also look at the applicants other assets besides his regular income to determine if the applicant has the means of making an equity investment, or down payment. If the client has large additional assets and they are fairly liquid ” like a large stock portfolio ” this may help offset other factors, such as a less than optimal debt ratio. If the applicant has enough additional assets to make mortgage payments outside of his regular income, this is viewed favorably by most lenders. This information is usually not included in a credit report and is why a mortgage lender will ask for statements from the applicants brokerage accounts and retirement accounts (IRAs, 401(k), etc.).

There is one key factor in the application that the client really has no control over: the property itself. A comprehensive appraisal of the property is always required before a loan is approved. This requirement keeps lenders from loaning out more than the property is valued at the time of purchase. The lender is covered if the loan must be foreclosed or goes bad in some other way; the resell value of the property will be at least enough to cover the original loan note.

This guideline can help a potential homebuyer in examining his own credit and make adjustments before applying for a loan. Having everything in order can streamline the process and be advantageous when the application is reviewed.

Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Credit Repair College empowers people to take control of their financial future by learning everything they need to know to repair credit on their own. For more information on fix credit rating please visit them on the web. Finance the Dream offers rent to own homes throughout the United States.