How Lenders Determine You're Creditworthy

Buying a Jacksonville Home

Your creditworthiness is one of the most important aspects when applying for a mortgage. Why? Simply because it typically determines not only the type of mortgage and interest rate a lender is willing to offer you but also whether you qualify for a mortgage at all.

Because your creditworthiness is extremely important, let’s first find out what being “creditworthy” actually means. In short, you’re creditworthy when one or more lenders are willing to offer you a credit card or a loan at a specific interest rate, so you can buy a home, a car, consolidate debt, cover medical bills, pay for education or a wedding, or fund other expenses.

In general, the most important thing that lenders consider when deciding whether you’re creditworthy is your credit score. If you’re a trustworthy borrower with a good or excellent credit score, lenders will generally offer you more favorable terms and a lower interest rate. However, the credit score is just one of the factors that lenders look at when determining your creditworthiness. If you’re in the market for a new loan or credit card, here are some of the things that most lenders rely upon in order to decide if you’re creditworthy. 

Credit History

If you have a good enough credit score to qualify for a conventional mortgage, VA loan, or FHA-insured mortgage, the lender will also check your credit report, which is kept current by the three nationwide credit reporting agencies: Experian, TransUnion, and Equifax. Your credit report is basically a list of all of your outstanding debts, including mortgages, car loans, personal loans, credit card accounts, and so on, as well as closed and settled accounts for past debts. It also includes information on whether you made your payments on time or what payments you missed. Accounts in collections, bankruptcies, foreclosures, and vehicle repossessions also show up on your credit report. In order to consider you creditworthy, most lenders want to see a consistent history of bills paid on time, without any late or missed payments.

Credit Utilization Rate

Although your credit utilization rate is already taken into account by the credit reporting agencies that calculate your credit score, lenders also review this rate before approving your application. Providing information about how much of your available credit you used before applying for a new loan or credit card you intend to get, this rate indicates whether you’re a responsible borrower or not. For example, if you have $1,500 available on one credit card and $1,000 on a different card, and the total balance is $550, your credit utilization rate is 22% ($550 / $2,500 = 0.22 x 100 = 22%). In general, a credit utilization rate around 20% is considered good. But even though some financial experts recommend using no more than 30% of the credit available, it’s important to know that most lenders prefer to see a credit utilization ratio below 10%. 

Debt-to-Income (DTI) Ratio

Because the DTI ratio indicates your ability to repay debt, lenders also consider this ratio when assessing your creditworthiness. The DTI ratio compares the total amount you earn every month to the recurring debt payments, including mortgages, car loans, credit cards, student loans, personal loans, and medical bills, and expenses, like rent and alimony. To calculate your DTI ratio, you need to divide your monthly debt by your gross monthly income and multiply the result by 100 to get a percentage. For example, if your total monthly debt is $2,500, and your gross monthly income is $6,500, your DTI ratio would be 38%. In general, to qualify for a mortgage, your DTI shouldn’t exceed 43%.

Assets That You Can Use as Collateral

Specific assets, such as a home or a car, can be used as collateral to secure a mortgage. Because collateral is what gives a lending institution the assurance that it can recover all or most of its investment by repossessing and selling specific assets if you default on the loan, using your assets as collateral can make you more creditworthy in the eyes of a lender. This can increase your chances of getting approved for a mortgage.

Many people who apply for a mortgage have a credit score and history. But what if you’re one of the 53 million Americans who don’t have a credit score? Although many people think it’s impossible to get a mortgage without a credit score and history, actually the opposite is true. Nowadays, lenders are willing to issue different types of loans to applicants without a credit score. To assess the creditworthiness of these applicants, lenders go through a more time-consuming application process, commonly known as manual underwriting, which involves using alternative data, such as bank account information (e.g. deposits, withdrawals, and/or transfers), rent payments, cable TV payments, and mobile phone payments.

If you’re in the market for a mortgage in the Jacksonville, FL area, but don’t know whether lenders will consider you creditworthy, contact our professionals today to find out your individual eligibility before even looking for a home!

Checklist to Buying a Home

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