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The 4 Basic Elements to Qualify for a Mortgage
Thursday, October 11, 2007
When you apply for a loan, there are 4 basic qualifications the lender will look at. They are your credit score, your level of debt to the level of income, your assets/reserves and the loan size compared to the value of the property. Based on these four criteria, the lender will be able to tell if you qualify for a mortgage and if you do what mortgage program you qualify for. Lets take a look at each one.
Credit: The lender will pull what is called a tri-merged credit report. This will give them credit scores from the 3 major credit bureaus. The first thing the lender will look at is your credit score number. These can range from 350 to 800. Typically they will use your middle score.
Next they will look for any late payments. A late payment is one that is over 30 days past due. The most important will be late mortgage payments. Any late mortgage payment in the last two years will affect what program you can qualify for. Other late payments such as credit cards will have a direct affect on your credit score. Finally, the lender will look at the public record section. This is where any judgments or liens will show up. These can affect qualification and in many cases will have to be taken care of in order to close the loan.
Debt to Income-Your debt to income level compares what you owe to what your income is. Lenders use your before tax income (gross income) for this calculation. So if you earn $5,000 a month and your monthly debts are $2,500, your debt to income ratio (DTI ratio) will be 50%. Lenders use debts, not living expenses. Debts would be minimum credit card payments, car payments, and installment loans. They would not include gas bills, cable bills or cell phone bills.
Reserves-Reserves are liquid assets that you hold. They can include cash in the bank, stocks, bonds, retirement accounts and any asset that is easy to liquidate. The lender will like to see a cushion of money in case of an emergency. They look at it in terms of the monthly mortgage payment of principal, interest, property taxes and insurance. They will take this number and require so many months of it in reserve. This number can vary from two months up to twelve months or more.
LTV-Loan to value. This is the ratio between the value of the property and the size of the loan. So a property worth $100,000 with a loan of $80,000 would equal an 80% loan to value. This ratio is important in determining how much money the lender will loan you. An 80% loan to value is the standard cut off for first mortgages. There are programs that will go above 80% with either a higher rate or the use of mortgage insurance. You can also use of a second mortgage to get over the 80% level.
These are the four basic elements that most lenders will look at when you apply for a loan. In certain circumstances if you are strong in one area, that might compensate for being weak in another area. These are general guidelines and each individual borrower will have a different set of circumstances.
Stuart Schmal is a Mortgage Planner in Long Beach, California. You can find out more about his mortgage planning practice at www.WatchMyMortgage.com