Obtaining a mortgage is becoming a bit easier. Credit scores required by financial institutions to qualify for a mortgage loan have been coming down. The average credit score for loans that have recently closed is down to approximately 730. This is on a scale which ranges between 300 and 850. Only a year ago, you would have needed a credit score of a minimum of 750 to qualify for a mortgage to purchase a home. You should note, that although the average credit score is approximately 730 on home loans which have recently closed, there are some financial institutions that are now offering mortgages to individuals with credit scores as low as 700. This allows more potential homeowners to have the opportunity of purchasing the American dream, a single family home.
What Are Loan to Value Ratios?
When a bank underwrites a mortgage loan application, one of the significant items they look into is called the loan to value ratio. The loan to value ratio compares the appraised value of your home to the amount of money you seek to borrow. An example of loan to value ratio is, let’s say you wanted to purchase a home that cost $400,000. If you had enough money for a 20% down payment, which would be $80,000, the loan to value ratio you would be looking for would be 80%. This simply means you wanted to obtain a mortgage of 80% of the value of the home.
Debt to Income Ratios
When banks underwrite a mortgage loan, they look into how much money you are earning. In today’s mortgage market, they only count the funds that appear on your income taxes. Money made off the books, which doesn’t appear on a tax return, will not be considered by a financial institution when underwriting a mortgage. The debt to income ratio is sometimes referred to as “DTI”. There are actually two components of the debt to income ratio. The first component is called the “front end” debt to income ratio. This represents the percentage of your total monthly income you will have to utilize to make your mortgage payment. The second debt to income ratio is referred to as the “back end DTI”. The represents the percentage of your total gross monthly income you will pay towards your mortgage plus all other debt obligations. This would include car payments, personal loans, money owed to American Express, Mastercard, Visa, gas station credit cards, store credit cards, and all other financial obligations.
Let’s look at an example of debt to income ratios. Let’s assume your total family income is $8,000 per month. For this example, let’s use a mortgage payment of $2,000 per month and other financial obligations of an additional $2,000 per month. In this example your front end debt to income ratio would be 25% and your back end debt to income ratio would be 50%. Banks are currently using front end debt to earnings ratios of 25% and back end debt to earnings ratios of approximately 38%. These are more liberal percentages than banks were using approximately a year ago.
Conclusion
Although the easy money days regarding mortgage financing are gone, banks are now being more reasonable with prospective homeowners with regard to loosening their standards to obtain mortgages.
Elliot Schlissel is a foreclosure attorney. For more than 45 years, Elliot and his associate attorneys have been litigating all types of real estate and foreclosure cases. Elliot’s goal is to help his clients stay in their homes and fight off foreclosure lawsuits brought by financial institutions. He also assists his clients in obtaining mortgage modifications on their homes.
