When you are applying for a home loan there are a lot of things that banks will look at when evaluating your creditworthiness.  Today we’ll look at three of those, credit capacity and collateral.

Your Credit score, or FICO score, is determined by three credit rating agencies, Transunion, Equifax, and Experian.  Your credit score can range from 350-850 and is determined to utilize several different factors including:

  1. How much debt you have outstanding as a percentage of open credit accounts
  2. How much debt you have outstanding
  3. How much total debt you have accrued
  4. How well you’ve paid  your bills over the years

In general, to get a loan, you will need a credit score of around 640.  The Optimal credit range is around 740-760 or higher.  The lower you credit score is the higher your interest rate is, and the more points you may have to pay on your mortgage loan.

Depending on your FICO score, the next thing a lender will look at is your capacity to pay off a loan.  The current numbers are approximately 36-38% of your monthly income towards a mortgage payment.

Finally, your lender will look at the collateral.  The collateral is the property you will be purchasing.  The bank will order an appraisal, and determine the LTV, or loan to value ratio.  The lender will loan you a portion of the value of your collateral, depending on the loan this may be as low as 80%, or as high as 96.5%.