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Mortgage Qualifying

When looking for a principal mortgage, one of the most important initial steps is qualifying. It is first useful to explain exactly what qualifying is. Qualifying measures the borrower’s ability to repay a loan. The willingness to repay the loan is determined by the borrower’s credit. A related process called underwriting is the final determination of approval or rejection, and is based both on qualification and credit.

Qualification always carries some relation to the amount of the loan you are looking for. For example, you may be qualified for a $200,000 loan but not a $300,000 loan. Qualification will also depend on your financial condition, i.e., income, debt, savings, etc., and market conditions, such as the interest rate. High rates result in higher monthly payments, making qualification more difficult.

The first thing lenders want to know is if you can pay the required down payment and upfront fees. Down payments can sometimes be reduced in exchange for higher rates, but this can affect the amount of loan you qualify for, as well. Also, down payments made from savings are usually favored over gifts, since the ability to save indicates financial responsibility in the eyes of most lenders.

In determining the sufficiency of income, lenders use both housing expense ratios and total income ratios. Housing expense ratios measure the relation of your mortgage payments to your total monthly income, and are set at a maximum of around 30 percent for most lenders. Total expense rations take into account other monthly debt as well as mortgage payments, and compare this total debt to monthly income. This ratio is generally set around 35 percent.

If you are outside the maximums, you shouldn’t give up hope. You may want to shop lenders, since different lenders have varying maximums. Some lenders also make exceptions if you are only slightly above the housing expense maximum but well under the total expense maximum.

Larger down payments and exceedingly positive credit ratings can also help if you are slightly over the maximum. Finally, extending your mortgage to a 30-year term, if this isn’t the term you are already considering, can reduce your payments enough to get you under the maximum.

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