Loan Qualification Standards - Loan to Value Ratio
Many folks have no idea how qualified they are as borrowers.
There are two ratios that, together with credit score, tell how qualified you are for a loan.
The more important of these two ratios is Debt-to-Income ratio, usually abbreviated DTI. The article on that ratio is here. The less important, but still critical, ratio is Loan to Value, abbreviated LTV. This is the ratio of the loan divided by the value of the property. For properties with multiple loans, we still have LTV, usually in the context of the loan we are dealing with right now, but there is also comprehensive loan to value, or CLTV, the ratio of the total of all loans against the property divided by the value of the property.
Note that for instances where you may be borrowing more than eighty percent of the value of the home, splitting your loan into two pieces, a first and a second, is usually going to save you money. (See here for an example)
The maximum loan to value ratio you're going to qualify for is largely dependent upon your credit score. The higher your credit score, the lower your minimum equity requirement, which translates to lower down payment in the case of a mortgage.
Credit score, in mortgage terms, is the middle of your credit scores from the 3 major bureaus. If you have an 800, a 480, and a 500, the middle score, and thence your credit score, is 500. If the third score is 780 instead of 500, your score is 780. If you only have two scores, the lenders will use the lower of the two. If you have only one score, most lenders will not accept the loan. Now, I've never seen scores that divergent, but that doesn't mean it couldn't happen. Usually, the three scores are within twenty to thirty points, and a 100 point divergence is fairly unusual. Despite what you may have heard or seen in advertising, according to Fair Issacson the national median credit score is 720. See here for details.
In order to do business with a regulated lender, you need a minimum credit score of 500. There are tricks to the trade, but if you don't have at least one credit score of 500 or higher, you're going to a hard money lender or family member.
Now, exactly what the limits are for a given credit score is variable, both with time and lender, even when you get into A paper. Subprime lenders will go higher than A paper, but the rates will also be higher. Nonetheless, there are some broad guidelines. At 500, only subprime lenders will do business with you, and they will generally only go up to about 75 percent of the value of the home. A few will go to 80 percent, but this is not a good situation to be in.
Currently, at about 580 credit score, you can still find subprime lenders willing to lend you 100 percent of the value of the home, providing you can do a full documentation loan. At 580 is also where Alt-A and A minus lenders start being willing to do business with you, although they won't go 100 percent until higher credit scores.
At 620, the A paper lenders start being willing, in theory, to consider your full documentation conforming loan. They won't do cash out refinances or "jumbo" loans until a minimum of 640, but they will do both purchase money and rate term at 620 or higher. They may not go 100 percent of value until 680, but they will go about eighty or maybe higher.
At 640 is where subprime lenders will start considering 100 percent loans for self-employed stated income borrowers. Not too long ago, I could find these down to 600, but the lenders have been raising these requirements of late. For w2 stated income (essentially, people who get a salary and don't want to document income) the minimum for 100 percent is about 660 now. Mind you, if you can document enough income, it is in your interest to do so.
660 is where A paper will start considering conforming stated income loans. They may not go above 75 percent of value, but they won't just reject you out of hand. At 680, they will consider jumbo stated income.
Now, it is to be noted that just because you can get a loan for only so much equity, it does not follow that you should. Whereas the way the leverage equation works does tend to favor the smaller down payment, at least when prices are increasing, it can also sink your cash flow. So if the property is a stretch for you financially, it can be a smarter move to look at less expensive properties to purchase. I have seen many people recently who stretched to buy "too much house" only to lose everything because they bought right at market peak with a loan they could not keep up. Many of these not only lost every penny they invested, but also owe thousands of dollars in taxes due to debt forgiveness when the lender wrote off their loan.
There are other factors that are "deal-breakers", but so long as your debt to income ratio is within guidelines and your loan to value is within these parameters, you stand an excellent chance of getting a loan. All too often, questionable loan officers will feed supremely qualified people a line about how they shouldn't shop around because they're a tough loan and "you don't want to drive your credit score down." First off, the National Association of Mortgage Brokers successfully lobbied congress to do consumers a major favor on that score a few years back. All mortgage inquiries within a fourteen day period count as the same one inquiry. Second, the vast majority of the time it's just a line of bull to keep people from finding out how overpriced they are or to keep you from consulting people who may be able to do it on a better basis. I've talked to people with 750 plus credit scores, twenty years in their line of work, and a twenty percent down payment who had been told that, when the truth is that a monkey could probably get them a loan! By shopping around, you will save money and get more information about the current status of the market.
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