Many factors determine home loans
Lenders look at employment, payment history
By Kevin Panet Special to the Acorn

For months now we have all heard the doom and gloom about the tightening of credit markets and how difficult it is to either purchase or refinance a home loan.

And while it is true that lending standards are no longer as loose as before, most lenders still understand that every loan application tells a story. If the numbers are there, and if the story is believable, the borrower stands a good chance of having their loan approved.

When a lender looks at a loan file, they are looking for three things: capacity, credit and collateral. The borrower must have the capacity to repay the loan. This is usually documented by W-2s, pay stubs and tax returns.

Next, the borrower must have a reasonably good credit score. This shows the lender the borrower's willingness to repay debts.

Finally, the loan can only be based on the appraised value of the home.

If there are any concerns in these three areas, then the lender will begin to look for compensating factors. Strong compensating factors include years with a single employer, years in a profession, solid demonstration of mortgage loan payments made on time, assets (cash, 401(k), life insurance) in the bank, low loantovalue of preferably 80 percent or less, and low debt-to-income ratio (higher levels of discretionary income).

All of these compensating factors can help tell a story of a borrower who might have had difficulties in the past but has now moved beyond that dark period in their life.

For example, consider the borrower who was laid off due to a company shut down. After several months of searching, the borrower found a new job in the same line of work and has been there for more than a year now. However, during the time of unemployment, they were unable to pay many bills and their credit score suffered, dropping to 603.

In this case, the borrower had been in the profession for more than 10 years. His family had lived in the same home for more than eight years, never missed a mortgage payment and their loanto-value was 63 percent.

In this example, the borrower has several compensating factors that will enable him to get a loan. The low credit score, though important, will not prevent this borrower from getting a loan.

Consumers who are currently considering the purchase or refinance of a home should consult with a professional loan officer to see if compensating factors can help lower their interest rate and improve cash flow.

It is estimated that more than 25 percent of current homeowners with adjustable rate mortgages are now experiencing higher loan payments as their mortgages have reset. With the right compensating factors taken into consideration, most of these homeowners could reduce their monthly housing payments.

Kevin Panet is a loan consultant with Sabre Mortgage in Moorpark. Contact him at Kevin@SabreMortgage.biz.