How well do you roll the D.I.C.E.?
There are four primary factors that lenders look at when considering the rate & term that a particular borrower may qualify for. They are Debt, Income, Credit, & Equity or D.I.C.E.
When pre-qualifying a prospective buyer the acronym D.I.C.E simplifies the understanding the why's of the rate and term that they been approved.
Debt - these are the current financial obligations for the borrower(s). They include credit card debt, auto loans, and student loans. This information is typically obtained from a credit report and it is the minimum monthly payment listed by the credit bureaus. The mortgage payment, taxes & insurance are also included. By dividing the gross monthly income by the monthly debt this determines the debt to income ratio of the borrower. For most loan programs the debt to income ratio should be 36% to 41% and it may vary as per the loan program.
Income - the total gross income for the borrower(s) from all sources. Required proof of income varies by the loan type i.e. Full Doc, Stated, No Doc, or NINA. The most common way to proof income is through current check stubs, W2's, 1099's, Proof of Tax Filings, Bank Statements and written verification of income.
Credit - there are three credit bureaus that provide credit history for a prospective borrower(s). They are Experian, Equifax and Trans Union. There are two ways to pull credit, one is called a soft pull the other is a tri-merge report. A soft pull is no different than getting a free copy of your credit report, only one of the three credit bureau is used and it only gives a snap shot according to that particular credit bureau. All lenders prefer a full tri-merge credit report.
A tri-merge combines the information on all three credit bureau into one easy to read report, in addition it provides your credit score as reported by each individual credit borough. This is really what all lenders look at first and we almost always use the middle score to qualify a borrower for a loan, though some times an average of the three is used.
Credit scores range from 350 to 850 and most lenders base approval on them. Higher scores mean lower interest rates. The median FICO score in the US is 723. Factors affecting your credit score are; Payment history - 35%, Amounts owed - 30%, Length of credit history - 15%, New credit - 10% and Types of credit used - 10%
Equity - Equity is the amount of down payment a borrower will contribute in a purchase transaction. In a refinance transaction, it is the difference between the Value of the home and the amount owed. The loan amount is a percentage of either the purchase price or value of the home and it is referred to as the LTV or Loan to Value. For example if you purchase a $100,000 home with a down payment equal to 20% of the purchase price you will automatically have $20,000 in equity on the home. In essence you are receiving an LTV or loan to value of 80%. In other words you are financing 80% of the home value living 20% of available equity.
How exactly does this affect the terms and rate of your loan? The higher the LTV ( loan to value) the higher your rate and even the terms may change. For example; an 80% LTV is a lower risk for the lender than a 95% LTV. Think of it in these terms - would you rather lend someone $80,000 on a $100,000 asset or $95,000 on a $100,000 asset. Which loan do you think is at higher risk of default? Which borrower do you think will walk away from the home faster, the person with $20,000 to loose or the person with $5,000 to loose?
The lower the LTV the lower the interest rate and the better the terms lenders are willing to offer a prospective buyer.
How do you roll the D.I.C.E.? Are you playing to win the rate and term game? When you roll the D.I.C.E. do you roll a seven or eleven or do you roll snake eyes?
Remember, the rate and term of your home loan is not determined by just one area of the Debt, Income, Credit and Equity matrix. While a particular area of the D.I.C.E matrix may influence the rate and term of your home loan. It is a combination of the entire D.I.C.E matrix that determines the best rate and term that you qualify for.
It pays to review and discuss this information with a Mortgage Banker before you enter into a purchase contract. Many times we can suggest ways to improve a particular area of the D.I.C.E. matrix increasing your borrowing power. We can help you determine and understand the best rate and term that you currently qualify for and why.
Remember, when looking for the best rate and terms, it is only a question of...
...HOW WELL DO YOU ROLL THE D.I.C.E.?
Comments(1)