When you apply for a mortgage loan, you will have to submit a lot of documents related to your finances, and the purpose of this is so the lender can see if you are in a financial position in which you can repay a loan if the lender gives you one. When you submit your information, the lender will also check your credit report to verify the debts you owe. Once the lender has this information, they will review it to determine if you are approved or not, and one of the steps they take during the reviewing process involves calculating the following three ratios.
The first ratio you can expect your lender to calculate is a debt-to-income (DTI) ratio, which is a ratio that compares the amount of running debt you have to your monthly income. Lenders prefer seeing low DTIs, but they will typically only approve loans if a person's DTI is below 36%. This would mean that 36% of your monthly income is already going towards the debts you have. If your DTI is higher than this, it can indicate that you would have trouble repaying a loan if they issued one to you.
Credit utilization ratio
The second ratio that is important to know about is called a credit utilization rate, which compares the amount of credit you are currently using to the available amount you have. For example, if you have a credit card with a $5,000 limit and you owe $1,000 on it, your credit utilization rate would be 20%. Lenders also like seeing low credit utilization rates, as this shows that a person is using their credit wisely. Your lender may calculate this ratio for each debt you have, but they may also calculate it as a whole by adding up all the amounts you owe and comparing this to the total amount of credit you have available to you.
The other ratio lenders often run is one that involves income. Lenders will often calculate this income ratio by multiplying your income by a certain percentage. This will show a lender approximately how much you should be able to afford to pay per month based only on your income. If you have a lot of debt, they may lower the percentage used on this ratio.
If you are interested in getting a loan, you will have a better chance of getting approved if you have good credit, good income, and low debts. You can learn more by talking to a mortgage lending service today.Share