Four Factors in a Lender's Loan Decision

[ed. My friend David Marx joins us again for this week's edition of Mortgage Monday.  He is principal of Dacor Financial and brings us his multiple decades of expertise as a mortgage broker.]

When evaluating a loan, our lenders consider four major factors.  What's interesting is that the priority of the factors has radically changed since 1983, when I started in the business.  Here's a little game to illustrate what the differences are!

Each factor is discussed below in no particular order.  As you read, take a moment to prioritize these factors the way you think a lender would today. Then try to prioritize them as a lender would have back in the 1980s.

Hint: The No. 1 factor in the 1980s is the No. 4 factor today.

Choice A: Liquid Assets

Lenders need to verify that you have money readily available for the down payment, closing costs and reserves. In the 1980s, lenders considered money in savings and checking accounts, as well as securities, as liquid assets. Today, lenders also take into account semi-liquid assets, Marc Greenberg such as IRA and 401k savings that, in the electronic age, generally can be turned into cash in 24 hours.

Choice B: Credit

In the 1980s, credit reports were less thorough and more subjective. Also, there were lots of holes and missing information. Credit scoring, a standardized point system designed to rate how creditworthy a borrower is, came into our industry in the 1990s, making underwriting credit evaluations much less subjective. In the eighties, getting an "easy" was the luck of the draw; different underwriters at the same institution could very well come up with different findings on the same file. In a sense, today's credit scoring system replaces the factor that mortgage lenders referred to as "character" in days past: face-to-face evaluations with your banker have given way to computers that churn out numbers according to a set formula.

Choice C: Collateral

With a mortgage, your collateral is the property you are buying or refinancing (and generally only the property). In 1983, a minimum down payment was 10 percent; now with zero-down, 100 percent loans, collateral is virtually non-existent in some loan scenarios. 

Choice D: Income

In the 1980s, income was evaluated on every loan, with an employment verification form, W-2's, income tax returns and paycheck stubs part of the standard operating procedure. Debt-to-income ratio could not exceed 40 percent. Today, our lenders accept "stated income" for many loan programs.  In fact, if you have good credit and substantial assets, income is virtually disregarded.  And debt-to-income ratio is now sometimes as high as 65 percent.  This isn't to say that these options are recommended for everyone.  But they're now available, when before they were unheard of.

My How Things Have Changed!

Over the years, I have closed 2,249 loans.  Looking back, it's amazing how things have changed. During my first year as a loan consultant, the average loan was $76,000; in 2005 the average reached $480,000. (Larger loan amounts make increases in conforming loan limits important.)

Also, "back in the day," the minimum down payment was 10 percent, with most people putting 20 percent down. With today's higher housing prices, 20 percent represents a huge chunk of cash, and zero-down, 100 percent loans are not uncommon. 

Oh, and I'd never leave you hanging without the answers.  In the 1980s, income was always evaluated and was the most important factor.  Collateral, credit, and liquid assets followed in that order.

Today, credit is king.  A good credit rating can often compensate for weaknesses in other areas.  Collateral, liquid assets, and income is the way the order in which they follow-up today!