Understand Your Situation
Know Your Numbers.
Lenders typically evaluate the 5 Cs of credit.
Capacity: How much disposaable income do you have to service loan payments? They typically consider monthly debt payments versus your regular monthly income. The lower your DEBT to INCOME (DTI) ratio the better. If your income is irregular or self-generating they typically use a two year monthly average. Find your past two W2, 1099, tax return and past 2 months bank statements.
Capital: How much skin do you have in the game? The more you have invested the better. They typically look at the appraised value of the property versus the loan amount. The lower the Loan to Value (LTV) ratio the better. The acceptable LTV will depend on your income circumstance and veteran status. Lenders will order their own appraisal and you foot the bill. Two months of bank statements will indicate how much extra cash you have available. The more cash the better.
Collateral: Lenders want to know how they will protect themselves if you don't pay in the future. Your property is your collateral. However, the acceptable type and condition varies with lenders.
Character: Lenders decide whether they trust you to meet your loan obligations. This is typically based heavily on your credit history and score. Your credit report should demonstrate responsible use of credit.
Conditions: Lenders will consider the purpose of your loan. Is this a refinancing with cash out, a purchase or a renovation project?
Comfort: At the end of the day both you and the lender must feel comfortable with your overall presentation and the lender's offer to help. They draft their policies and procedures in line with federal and state regulations to protect you, the consumer, and maintain trust and comfort with the home loan process.