The 4 Factors of Lending

THE 4 FACTORS OF LENDING

There are 4 factors that determine your interest rate and a lender places a measurement of risk against each of these factors. The higher the risk, the higher your interest rate will be. The 4 factors are: Mortgage or Rental History, Income, Credit and Assets.

MORTGAGE OR RENTAL HISTORY

Your rental or mortgage history is very important when you apply for a mortgage. The lender needs to know if you have been late on either your mortgage or your rent during the last 12-60 months. If you are a renter, your cancelled checks, or the automatic deduction from your bank account will serve as proof as to the timeliness of your payment. If you own a home your credit report will indicate how promptly you paid your mortgage. However, if you are a renter, cash payments to, and personal receipts from landlords are not acceptable because the lender believes they are not authentic.
If you have been late on either your mortgage or rent, the lender will then have to determine how recent your late payment was, (was it over 30, 60, 90, 120 + days?), how many late payments and what were the circumstances. A risk factor will then be determined by the lender.
INCOME

Your income should be enough to satisfy the requirements of the loan. Acceptable types of income to a lender would include the following:
• Wages and Salary
• Overtime and Bonuses
• Part-time or Second Job Income
• Seasonal Job Income
• Commission Income
• Tax Exempt Income
• Military Income
• Interest and Dividend Income
• Notes Receivable or Installment Sales Income
• Trust Income
• Alimony and/or Child Support
• Pension, Retirement and Social Security
• Disability Benefits
• Foster-care Income
• Veterans Benefits
• Unemployment Benefits
• Automobile Allowances and Expense Accounts
• Rental Income
• Boarder income (tough to prove – 1 in 10 chance)
• Co-Borrower Income (occupying or non-occupying)


PROOF OF INCOME

We are listing 4 different types of income that had been available. Due to the current circumstances, the banks have eliminated most of these programs. Please check with your Mortgage Broker/Lender for available programs.

Full Documentation: This refers to your ability to substantiate how you receive your income. For example, current pay stubs, and 2 prior years W-2, 1099, Tax Returns, etc. and proof that your current form of employment will be continuing in the foreseeable future are all forms of documentation.
Bank Statement: There are some individuals and small business owners who make an income but it is difficult to provide documentation to that effect. For those individuals the lender will use their bank statements for a period of 12 months and arrive at an average of the deposits made to the account to determine income. Of course, this factor is riskier than the former.
Stated Income: This is the riskiest income of all to the lender. These individuals work but their income is difficult to prove and is derived from a variety of sources such as: self employment, tips and cash sales. Many do not keep proper records but they pay their bills on time and the credit report reflects the timeliness of their payments.
No Documentation: Individuals are able to secure a mortgage based solely on their credit score. If credit is so good, the lender felt that if someone was able to manage their credit in such an efficient manner, then they would be able to pay their mortgage in the same way. The trend of thought is that past performance in paying one’s debt would be a good indication as to the future.

DEBT RATIO

A Debt Ratio is a percentage of income the lenders will utilize to determine the maximum spending on Housing Debt (Top or Front Ratio) as well as Total Debt (Bottom or Back Ratio) which includes monthly Housing, Car, Installment Loans and credit card payments. If you are above their threshold for ratios, then the loan develops into a greater risk and may be declined.
Different loan programs have different debt ratios. The Federal National Mortgage Association (FNMA) has its own debt ratio and Federal Housing Authority (FHA) has another set of debt ratios. These ratios are 28-29 top/front ratio and 36-41 the bottom/back ratio respectively.

CREDIT
The third factor in determining your rate is your credit score. The number ranges from zero to the 850’s. To find a score on either end of the scale is extremely rare (unless there is no score at all – which would automatically be 0). The higher the credit score, the better the interest rate. This is a big factor in determining your interest rate. Please see It's All About Credit for more details.

ASSETS

Assets are a major factor when purchasing a home. This shows the bank that you have saved enough money for the down payment as well as closing costs associated with the mortgage. They want to ensure that you have not borrowed the funds which would have to be repaid. So they usually review 2 months bank statements to see if any large deposits were made. If there are, then they may require proof as to the source of the deposit.
The lender would also like to make sure you have enough money left in the bank after closing to make between 2 to 6 months of payments. These funds are called RESERVES.
Assets can be Checking Accounts, Savings, 401k, Stocks, Bonds, etc. Basic rule for asset qualification is the asset must be capable of being liquidated into cash within 24 hours ** 401k or 403b accounts can be counted at 70% of their current value, state retirments (not available for withdrawl are not). You may not use your car or home because it’s not easy to sell those assets quickly. If any major asset has been sold recently, a bill of sale will be required.
There are programs from time to time to where you can State your Assets, or not show any assets. But these programs increase the risk and have a negative effect on your interest rate.