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.