Self-Evaluating Mortgage Loan Worthiness

4 Replies

I would like to evaluate all options for purchasing a second rental property. Among those options is applying for a mortgage loan. However, rather than just go out and submit an online application for a mortgage loan pre-approval and submitting my SSN for a hard hit on my credit score, I’d like to better understand, in as much detail as possible, what it is mortgage lenders are looking for while evaluating mortgage loan applications. In doing this, I would be able to evaluate myself long before I ever approach a lender and would be able to better understand the limits of what I can reasonably expect to be approved for given my circumstances. Then, once I’ve best calculated my financial reach, I can walk up to a lender with all proper paperwork in hand and get the process started.

My current understanding is:
1. Credit Score (FICO 5,4,&2 - Middle Score)

2. Cash Reserves On Hand

3. Down Payment

4. Debt To Income Ratio

Are there any lenders out there that would be able to better describe the process for me or point me in the direction of where I can find out the specifics of where this is done. 

DISCLAIMER: I have done a reasonable search on BP and I’m surprised that I haven’t been able to find this information in a post up to this point. However, I freely admit that I may have overlooked a post just like this. If there is one, I’d be happy to be pointed to it so long as it’s still relevant.

Thanks everyone!

Hi Steve, it can be a little overwhelming to calculate exactly how much you can get approved for. If you are looking to buy an investment property I usually recommend a DSCR loan which does not use your personal income at all. DSCR stands for debt service coverage ratio and there is no debt to income requirement. You could be unemployed and still get approved for a DSCR loan as long as you meet the credit and asset requirements. In most cases the property must generate enough income every month to cover the mortgage payment. However I have seen DSCR loans get approved where the cash flow from the property does not cover the mortgage payment. Generally lenders want to see a credit score of at least 680 for these programs and 20% down. Reserve requirements may vary from lender to lender. Rates are also pretty comparable to conventional financing.

Conventional financing honestly has a lot more hoops to jump through, especially for investment properties when compared to a DSCR loan. One thing investors run into a lot is that it can be very complex to calculate your income from your tax return and if you do not show a lot of income on paper, your purchasing power can be reduced. If you're paid hourly it's pretty easy but there are rules and exceptions to almost every type of income calculation (i.e. if you get a bonus, you need to show receipt for 2 years, if you make variable/commission income you need to have a certain amount of time on the job etc.) In most cases you can use the anticipated rental income from the property you're buying.