Shopping for a new home can be an exciting adventure full of anticipation for what the future holds. But securing a mortgage to buy that new home… not so much. Trying to get the needed financing is more often characterized by anxiety and apprehension. But if you know what to expect and are armed with the right information, the whole thing will be a lot less anxiety-ridden and much easier to navigate. To that end, here are the 6 things your lender will look for when buying real estate in Los Angeles.
1. Credit Score and Payment History
Probably the first thing lenders will look at when you’re buying real estate in Los Angeles is your credit score. In our grandparents’ day lenders would have first considered a borrower’s character. But today’s credit score has supplanted character as a measure of a person’s likelihood to repay the mortgage loan. For lenders, a high credit score means low risk.
“Your credit reports contain information about your credit accounts and transactions. A lender can look at your credit reports to learn how often you make payments on time and how many accounts (credit cards, auto loans, student loans, etc.) you have in good standing. A credit score is a three-digit number that reflects the information in the corresponding credit report. Knowing what goes into your credit scores and reports can be the first step to improving them so that you can make a good impression on potential lenders.”
Although different lenders use different scoring models, the higher your score, the better off you will be as a borrower. So if your credit score isn’t all that sterling, begin working now to get it up.
2. Ability to Repay
In addition to credit score, lenders use other tools to assess your ability to repay. The two biggest things here that lenders will look at when you’re buying real estate in Los Angeles are your employment and income. So in applying for a mortgage, you need to have ready (at a minimum) your most recent income tax return, a few months’ worth of pay stubs, and six months’ worth of bank statements.
More important, though, in assessing your ability or capacity to repay will be stability. A lender will want to know that you don’t jump from job to job and that your job isn’t in an industry where layoffs are common. Lenders want to be assured that you will keep your job and that there will be a job there for a long time for you to keep.
Lenders also consider your debt-to-income (DTI) ratio. “This metric helps them evaluate how much additional debt you can handle and how much of a credit risk you pose. Though your DTI ratio isn’t one of the key factors . . . it can still have a significant impact on your ability to get credit.” In short, if a big chunk of your income is already going to pay existing debt, a lender won’t consider you a good risk for a mortgage.
3. Reserve Capital
Also, when buying real estate in Los Angeles, you need to have some reserve capital. If you have cash in savings, investments, or assets you can quickly and easily liquidate, you will appear more attractive to a lender because, if you experience any kind of financial hardship, you have a financial safety net . . . and can keep making your monthly mortgage payments.
According to financial experts, “if you don’t have cash in the bank after you’ve bought a house, you could be vulnerable. . . . [A] cash cushion can act as a shock absorber for everything from home repairs to a job loss. Oftentimes, mortgage lenders will frame your savings in terms of a certain number of mortgage payments that you have in the bank.”
4. Total Debt
We’ve mentioned the debt-to-income ratio as one of the important considerations for buying real estate in Los Angeles. But that isn’t the whole debt picture that lenders are interested in. Yes, a lender will want your debt-to-income ratio to be within certain bounds – typically between 43% to 50%, calculated by dividing your total monthly debt payments by your gross monthly income. Your lender will also want to be assured that you aren’t in the process of going or planning to deeper in debt.
This means that you should avoid borrowing to make any new, major purchases. Remember: lenders will re-check your credit at some point before closing, and new debt will at least delay and could even shut out your mortgage loan. And don’t mention any new debt you plan to take on – such as buying a new car or doing a major kitchen remodel once you own the house.
5. Employment History and Income
We’ve also mentioned your stability, especially employment stability, as important to lenders. There is, though, more to this one as well.
“Just as a lender will review your income,” industry pros assert, “the same can be said for employment history for most loans. Not having steady work for the last two years could potentially impact your eligibility.” Even if you’ve been steadily employed, lenders want to see that you’ve been at the same job for at least two years. If you are stable in your job, you are more likely to be stable in making your mortgage payments.
In addition, lenders don’t want to see any wild swings in your income (unless it’s in a dramatic upward direction). An up-and-down income for whatever reason – demotion, self-employment swings, industry upheavals – won’t make you appear a very good risk to lenders.
6. Ability to Make Down Payment
And, of course, when buying real estate in Los Angeles, you have to be able to make the down payment. Although you may not have to come up with the traditional 20%, you’ll still (typically) need to be able to come up with the cash to pay at least 3% down. And that’s a good thing, really, because it’s an investment in your home’s equity.
Although there are many low down programs available today, there’s still a catch – private mortgage insurance. “There are a number of programs that require a lower down payment, allowing you to finance up to 97% of the purchase price. But in most cases, you’ll have to pay mortgage insurance if you put down less than 20%. This extra insurance protects the lender against losses if you default on the mortgage.”
Work With an Agent
When you’re buying real estate in Los Angeles, these are the 6 top things lenders will look for. Still, emphases will vary from lender to lender, and some will likely consider additional factors. Your experienced local agent will be your best resource in finding out everything you need to know to get that mortgage.