Your credit score is just one element that goes into a lender’s approval of your mortgage. Here are some other things lenders look at.
1. Debt-To-Income Ratio
Debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying off debt. Again, having less debt in relation to your income makes you less risky to the lender, which means you’re able to safely borrow more on your mortgage.
To find your DTI, divide the amount of recurring debt (credit cards, student loans, car payments, etc.) you have by your monthly income. Here’s an example:
If your debt is $1,000 per month and your monthly income is $3,000, your DTI is $1,000 / $3,000 = 0.33, or 33%.
It’s to your advantage to aim for a DTI of 50% or lower; the lower your DTI, the better chance you have at being offered a lower interest rate.
2. Loan-To-Value Ratio
The loan-to-value ratio (LTV) is used by lenders to assess their risk in lending to you. It’s the loan amount divided by the house purchase price.
For example, let’s say you buy a home for $150,000 and take out a mortgage loan for $120,000. Your LTV would be 80%. As you pay off more of your loan, your LTV decreases. A higher LTV is riskier for your lender because it means your loan covers a majority of the home’s cost.
LTV decreases when your down payment increases. Going off the example we’ve just used, if you get a mortgage of $110,000 instead because you put down $40,000 ($10,000 more than before), your LTV is now 0.73, or 73%.
Different lenders accept different LTV ranges, but it’s best if your ratio is 80% or less. If your LTV is greater than 80%, you may be required to pay a form of mortgage insurance . Keep in mind that this varies by loan type and some loans, like VA loans, may allow you to finance the full purchase price of the house without you having to pay mortgage insurance.
3. Income And Assets
Your lender wants to be sure that you maintain steady employment. Lenders often ask for 2 years of proof of income and assets. The steadiness of your income could affect the interest rate you’re offered.