Finance
How Lenders Set Mortgage Rates
April 26, 2010 by GregoryL · Leave a Comment
Many people who are looking for a mortgage want to know exactly how much they can borrow before they become involved in a mortgage. The fact is, banks and lenders use a variety of complicated factors to evaluate your ability to repay any loan.
Income and Cash Reserves Will Affect Your Eligibility
Lenders will take a look at your income to make initial determinations about your mortgage. Obviously a high income will help you qualify for more money in loans. However, banks and lenders also investigate your job security. If you’ve been working somewhere for a long time, you’re likely to be received favorably by lenders.
Many banks and lenders will also check to see what your cash reserves are. If you’ve got a checking account with a sizable amount of available funds, the bank will be more likely to offer you a high loan. They’ll also take a hard look at your credit history. People with good credit are likely to receive loans, while people with little to no credit will have a hard time even with a small bank loan. This is due to banks restricting their loan process during the economic crisis.
The Front-End Ratio and Back-End Ratio
Lenders will analyze something called the “front-end ratio.” The front-end ratio is actually a measurement of how much of your income will go to paying your mortgage. They want to make sure that your total payment doesn’t exceed 28% of your pre-tax monthly salary.
They’ll also take a look at the “back-end ratio.” The back end ratio is a number that refers to how much of your gross income will be needed to pay all debts combined. This will include all of your payments, such as your mortgage, car payments, alimony, etc.
Only Borrow What You Need
Remember, you don’t have to take every offer you get. If a lender agrees to lend you a sizable chunk, only take it if you absolutely need it. If often makes sense to borrow less money and put down a higher down payment on a home. Only sign a mortgage that you can afford, and that gives you the freedom to put away money for other expenses.
