So you see that the prices on Knoxville homes for sale are rising and you have made the decision to take advantage of the historically low interest rates being offered by banks on Knoxville real estate. Although the uber-strict lending standards that were suffocating the market are letting up a bit, there are still distinct criteria which you will have to meet to be found credit worthy.
The Top 3 buyer traits that lenders love are:
- #1 Top Notch Credit History – The very first thing a lender will do is pull your credit report and look for a good, solid credit history. While perfection isn’t needed, you need to know that should you be approved your credit history will ultimately have an impact on the interest rate you receive. The better the credit history, the lower the interest rate and vice versa. Lenders we spoke with said a score of 750 and above will get you the best possible rate and conditions. 720 and above will still get you close the best rate, but other conditions may not be the same. Scores below 640 will find it difficult to get approved for a loan.
- #2 Low LTV or Loan to Value Ratio – Because the risk of default is always at the forefront of a bank’s lending decisions, Loan To Value Ratio is a huge part of that equation. It is one of the key risk factors that lenders assess when qualifying a potential buyer for a loan. The Loan to Value Ratio is the ratio of the loan amount compared to the appraised value of the home. For example if you were obtaining a loan of $300,000 on a home appraised for $350,000 the LTV would be 86% ($300,000/$350,000). You may have heard that most lenders want a 20% down payment. This is because lenders like to keep the Loan to Value Ratio at about 80%. Similar to having a above average credit score, if you are able to lower your Loan to Value Ratio, it can improve your interest rate and conditions.
- #3 Stable Income – This important aspect that lenders look closely at encompasses both your income and debt levels. They will want to know about your income. How much it is and how steady it is. How long have you been working at this particular job. Once they know what your income situation looks like every month they will look at your debt. Then they calculate what is called your “Debt to Income Ratio”. This ratio calculates two different things. First it takes your average monthly income and compares it to your housing expenses (mortgage payment, homeowner’s insurance, property taxes, homeowners association dues, mortgage insurance). The second calculates your average monthly income and compares it to your total recurring monthly debt payments (credit cards, car payments, student loans, etc.) Most conventional financing requires a Debt to Income Ratio of 28/36 (28% of your monthly income for housing expenses/36% of your monthly income for total expenses).
Here is an example:
In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:
- Yearly Gross Income = $48,000 / Divided by 12 = $4,000 per month income.
- $4,000 Monthly Income x .28 = $1,120 allowed for housing expense.
- $4,000 Monthly Income x .36 = $1,440 allowed for housing expense plus recurring debt.
Judging from the example above, if you make $4,000 per month, it means that a lender would be unlikely to approve an amount that resulted in your housing expenses exceeding $1120 per month or your total debt payments adding up to more than $1,440 each month.
Knowing these Top 3 Traits before speaking with a lender or looking at Knoxville homes for sale can give you a pretty clear road map of what you can expect. The key to a smooth Knoxville real estate transaction is eliminating surprises. The moral of this story is, before you jump into the home buying process, you should have these things squared away: 1) Fix any issues with your credit 2) Save up for your down payment 3) Reduce your debt.
For information on Knoxville Real Estate or for a referral to one of our trusted lenders contact us at 865-999-0925 or EMAIL US HERE.