Mortgage lenders carefully review a borrower’s ability to manage their finances when they apply for a mortgage loan. This includes reviewing their spending habits. This does not mean the mortgage lender cares how much money the home owner spends buying coffee or clothes. The mortgage lenders do review how well the home owner manages the credit lines already given and if the home owner has an ability to save money. The home owner who lives paycheck to paycheck may have a difficult time repaying the mortgage, if a financial crisis occurs.
One of the primary ways mortgage lenders review a borrower's spending habits is by reviewing the credit report. The credit report provides the lender with all of the open credit lines, including auto loans, personal loans, credit cards or any other debts owed to a lender. The mortgage company only looks at the repayment history, the minimum monthly payment amount and the borrower’s credit scores. They don’t care what was purchased; they care about how well the borrower repays the debts.
Mortgage lenders ask for bank statements, not to review where a borrower shops, but to see how much money he has in the bank. The mortgage lender reviews the bank statement history looking for large deposits, not resulting from payroll, and to see if the home owner has any non-sufficient funds items. Mortgage lenders like to see the borrower has a history of saving some earnings each month. In addition, if the loan requires the borrower to bring money to close, such as when buying a home, the lender must verify the source of the funds to close.
Mortgage lenders also like to see other savings types from the borrower. The borrowers who regularly invest money into an IRA, 401k or other retirement account are less of a credit risk than others that do not have any savings. This doesn’t mean the borrower must provide all of her savings accounts to the lender if she does not want to. However, this can help persuade a lender to approve a file that is at risk of not qualifying
One other way mortgage lenders review a borrower's spending habits is by comparing the amount of debts owed on a monthly basis to the borrower’s gross monthly income. Mortgage lenders calculate the Debt-to-income ratio, DTI, by adding up all of the minimum payments required on the credit report plus the new mortgage payment and dividing the sum by the amount of pre-tax income earned by the borrower. The lower this percentage is, the better the mortgage company likes it. Mortgage companies prefer not to see this number exceed 40 to 45 percent, because the borrower still needs money to pay taxes, provide insurance, pay for food and other lifestyle expenses.
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