Lenders' Criteria For Offering The Best Home Loan Rate

Lenders consider many things in deciding whether to extend a home loan. Not all lenders use the same factors, but most lenders do reserve their best home loan rate for a borrower who can demonstrate income and debt ratios sufficient to meet or exceed monthly principal, interest, taxes and insurance payments.

Common Guidelines Lenders Use When Evaluating A Home Loan

• Capacity - Lenders will review your employment history to determine if you have the capacity to repay your debt obligations - specifically, the home loan in question. How long have you been working at your current job? How much do you earn? What is your future earning potential?
• Credit - Lenders will review your credit history, consider how much debt you have incurred, and how you manage your debt responsibilities. How much do you owe? Do you pay your monthly bills on time? Are you consistently late in paying bills?
• Character - Lenders will look at how you pay your bills. They will also take into consideration any history of lawsuits or bankruptcies.
• Collateral - Lenders will evaluate the value of the property, a source of protection for the money they lend. The lenders want a guaranty that they will get back the money they lend. Is the property worth the risk? What are the chances that the property will decrease in value?

Reasons Home Loans May Not Be Approved

There are several common reasons why lenders may deny a home loan application.

• Poor credit report - A negative credit report generally indicates that the homebuyer has not established a good credit history. Your first step should be to verify that the credit information issued to the lender is accurate. Ask to see a copy of your credit report that the lender received, or obtain a copy of your credit report yourself from your local credit bureau. There are likely steps you can take to restore your credit to an acceptable level. Depending on your situation, rebuilding your credit may only delay your home purchase for a short time.
• Not enough income - Your ability to pay off a home loan is reflected in your current earnings and your future income potential. Lenders may decline a home loan if the homebuyer does not meet the income requirements or cannot show proof of stable income. It is to your advantage to establish a consistent and stable income.
• Too much debt - If your existing debts (credit cards, car loans, student loans) exceed the debt-to-income ratio for the loan, determine if you can pay off some of your debts before you apply for a mortgage. If you have credit cards you don't use, cancel them. Inactive credit cards are still considered potential debt. 

Options If Your Home Loan Is Not Approved

A lender is required by law to explain in writing the reasons why your home loan was not approved. An important thing to remember is that if the lender declines your loan application it does not necessarily mean that the purchase of a home is not in your future.

You still have some options available. For example, you may want to research other lenders in your area. Fees and home loan options vary by lender. You may be able to find another lender that offers more suitable home loan packages or charges lower fees. Another option is to increase the size of your down payment. If you can increase your down payment, you will reduce the amount of money you have to borrow. This might help you qualify for the home loan.

Finally, consider the wide variety of government-assisted resources available to prospective homeowners. For starters, check with your local HUD office about additional programs and resources available to you, or Click here for a list of HUD programs available nationwide.

Credits: Department of Housing and Urban Development