Things to consider when applying for a Mortgage

Lenders generally offer the best interest rates to borrowers who have a lot of equity in their home, assets, documentation of income and minimal debt. Lenders look at a borrower's entire profile to determine the risk level of the loan. This is why different borrowers qualify for different programs and interest rates. The higher the risk of the loan to the lender, the higher the interest rate. Consider these questions when talking with your Alerio representative:

What is your job history?

Your employment history is important when thinking about applying for a mortgage. In general, lenders like to see steady employment history and income when considering you for a loan (preferably two years). If you have been unemployed or have had frequent job changes in the past two years, there are loan programs available for you, but they may carry higher premiums (interest rates).

Can you verify your income?

Lenders are able to verify income a few different ways depending on how you receive payment. Three of the most common types of income documentation are: full documentation, stated documentation, and no documentation. If you are paid W-2 and receive pay stubs documenting gross income and year to date earnings, you are eligible for full documentation. If you are self-employed and receive income through your business or receive bonuses for you salary, you would most likely be stated documentation. Stated documentation is used if you receive income more sporadically or do not document all income. (If you are self-employed and have your taxes prepared by a CPA you may qualify for full documentation upon review of your tax returns.) If you are currently unemployed or have had significant gaps in employment, you would most likely go with no documentation. This means income and employment would not be used to qualify you for the loan. Income verification and documentation are important factors in determining loan products and interest rates available. Lenders assume the least risk with full documentation borrowers, and the most risk with no documentation borrowers. In general, fully documented borrowers will have more options when choosing a loan product than will borrowers with stated or no doc because of the risk involved. Interest rates offered are also typically lower for fully documented borrowers.

How much income do you need to qualify?

Your debt to income ratio is the amount of monthly debt you have as compared with your monthly income. Mortgage companies use ratios to determine a mortgage amount the borrower can handle. Two different ratios are considered. The housing ratio is your front ratio. You can determine your housing ratio by dividing you monthly mortgage payment by your income. Your total debt expense ratio, or back ratio compares your total monthly payments including your mortgage payment to your monthly income. Your monthly debt includes any regular monthly payments you make, including credit cards, mortgages, student loans, auto loans, etc.

Add the following to determine your back ratio.
  1. Monthly Car Payment
  2. Credit Card Payment
  3. Student Loan Payment
  4. Alimony or Child Support
  5. Taxes on the property
  6. Homeowner's Insurance
Total MONTHLY liabilities $
Divide the liabilities by your monthly gross income.
  1. For example, if your gross income monthly is $3,500, divide $1000 by $3500. Your back ratio would be 28.571%. (**For most loans, your back ratio should be below 45 or 50% to qualify.)
Determine your front ratio.
  1. To determine your front ratio, deduct 28.571% (your debt expense or back ratio) from 45%. Using this example, you could allocate 16.429% of your monthly gross income towards your mortgage payment. In this example 16.429% of $3500= $575.02. As a borrower you would be eligible for a mortgage with an approximate monthly payment of $575.01 or less.

The following examples provide additional estimates for mortgage payments with a designated mortgage amount and interest rate.

Amount Interest Total
$100,000 6% $599.55
$90,000 6% $539.60
$80,000 6% $479.64
What assets do you have?

Asset information is also required when applying for a mortgage. Liquid assets are money you have in bank accounts or other funds such as stocks and bonds, mutual funds, or trusts. Other assets could include real estate owned. Any assets you have make your loan stronger because they assure the lender you have money to back up future mortgage payments. Assets you declare on your loan application must be documented and able to be verified by the lender.

What is your loan to value?

When lenders talk about loan to value, they are referring to the balance of your mortgage as compared with the value of your home. This is the amount of equity you have in your home. If refinancing, the loan to value is important because it determines the amount you are able to borrow using your home as collateral.

What is your credit score?

Your credit score (FICO score) is one of the most important factors for lenders when considering borrowers for loans. All lenders obtain credit reports with information about the type and number of debts you have, late payments, collection actions, outstanding debt, and the age of your accounts. Your credit score helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. It is very important to maintain a favorable credit score to ensure you are eligible for the best loan products and interest rates available.

How long do you plan to stay in the home?

The length of time you plan to stay in your home is an important question to consider when applying for a mortgage. Certain types of mortgage products are better suited for certain situations. For example, if you have just found the home of your dreams and are planning to stay in your home for a long time, you may want to consider the fixed mortgage products available. Fixed term mortgages offer a fixed interest rate and payment amount for the life of the loan. These loans offer stability and peace of mind in knowing there will be no surprises, such as changes in interest rates. If you are planning to purchase a home to make improvements and then sell the house a few years down the road, an adjustable rate mortgage (ARM) may be best for you. ARM products offer a lower, fixed interest rate for the initial term of the mortgage, and then become adjustable depending on the terms of the loan.

If refinancing, how long have you owned the home?

Some mortgage products have requirements for title seasoning, meaning the length of time you have been in the house. For some products, you must be in the property 6 months or 12 months before you are allowed to refinance. You will need to check the terms of your loan if you are thinking of refinancing within one year of assuming title.

If refinancing, do you have other liens against the property besides a mortgage or home equity line of credit?

If you have existing liens against your property in addition to your mortgage (and/or second mortgage or home equity line), most lenders require all other liens be satisfied when refinancing. Other liens to be mindful of could be tax liens, outstanding child support, construction liens, or water/power/sewer liens. Most title liens do not show up on individual credit reports and are undetected until the title search prior to closing. It is important to be mindful of possible liens when estimating the cost of refinancing.