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Underwriting Guidelines – What Lenders Look ForFor many generations, bank loan officers and mortgage providers followed a relatively set standard. Lenders looked at a loan request with the assumption that the loan payment would not exceed twenty six to twenty eight percent of the borrower's monthly gross. The other key statistical requirement was that the borrower's total monthly debt service could not exceed thirty six percent of the total household gross. Today, lenders will accept much higher debt to incomer ratios. Moreover, the old standard requiring a twenty percent down payment has been set aside; there are mortgage packages available that finance one hundred percent of the home's value.
Today's lenders divide potential borrowers and the loans for which they qualify into two basic classes: prime and subprime. As the names indicate, prime borrowers are individuals with good credit histories. The standard used to define credit rating is the FICO score, the credit point system that turns up on any credit report issued on an individual. Lenders consider potential borrowers based on a risk analysis: a person with a history of credit problems or one that has substantial debt responsibilities is going to be more likely to default on a mortgage loan. The redline in the FICO system is a score of 620. Generally, borrowers with credit scores below that mark will be considered higher risk loan candidates and therefore subprime borrowers. A subprime borrower may expect to pay perhaps two percent more in interest on a loan than a prime borrower taking out the same note. There are also levels of risk within the subprime category, especially since so many borrowers today fall into that category. Because the housing market that has exploded in value and there has been a marked increase in indebtedness for the average American, the subprime market has risen to prominence. This in turn has required lenders to look more closely at each borrower's debt or credit situation, and apply some in-house analysis as well. Lenders evaluate potential borrowers on their FICO scores, and also on a number of other characteristics. While there may firmly established definitions for prime and subprime loans among mortgage insurers and investors, the loan originators have some flexibility in matching borrowers with loan rates and products. Banks have long since loosened rules that once prevented many low- to moderate-income people from buying houses. Today, poor credit may be mitigated in the eyes of the lender if the principal problem was, for example, unpayable medical expenses. Today there is quality bad credit and just plain bad bad credit. Lenders are going to want to see salary history and two or more years of tax returns. If you have credit issues, be prepared to discuss them; lenders are often looking for a way to justify doing business just as much as borrowers are looking for a way to explain past financial difficulties. There are no absolutes in the mortgage market, unless the potential borrower has absolutely no financial credibility. For that reason, a consumer should not assume that subprime credit means he or she has no bargaining power. Subprime credit does not mean the borrower shouldn't shop for the best deal, or that he is limited to a certain type of loan. Source: Mortgage Lenders Plus.com
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