Hal's Mortgage Blog

There are only 4 things that lenders need to consider when qualifying a borrower for a mortgage loan. However, each category has so many “what if’s” and variables— and that’s where it gets complicated!

I’d like to start with the basics and give you an overall picture of what I have to consider with each person applying for a mortgage loan.

1. They Have To Have Income!
Because most mortgages have monthly payments, I must determine if the borrowers have enough money coming in each month to pay their bills, eat, buy clothing, support their family AND still have enough money left to pay a mortgage payment and utilities!

That’s where the two “ratios” come in—the “housing payment ratio” and the “debt-to-income ratio”. The 1st ratio is where I take all the gross income (not net income), figure the monthly mortgage, taxes, insurance and PMI insurance and divide it by the borrowers gross income. That number should be 31% or less.

The 2nd ratio also uses the total gross income. Not only is the total proposed house payment considered, but every single debt that the borrower has. And by debt, I mean credit cards, car payments, student loans, child support—what they are legally obligated to pay on a monthly basis. Taking that total and dividing it by the gross income, it should not exceed 43%.

The tricky part? Determine what income to use. What cannot be used is cash income, short term income (part time job they just started) or income that may not continue for at least 3 years into the loan.

Oh, and the ratios also depend upon the type of loan program. If you use these ratios, you’ll be pretty safe for virtually any loan type.

2. They Have to Have Cash!
Depending on the loan program, the borrower may not need any money (USDA or VA), 3.5% down (FHA) or 5% to 20% down (conventional loans). Also, depending on the loan program, they may get away with getting a gift of cash for family members.

In any case, we look for “cash reserves”. What that means is that we don’t want the borrower to use every last dime they have in the bank (to buy the home) and have no money left over for emergencies, home repairs and living expenses.

3. They Have To Have an Acceptable Credit Score!

Clients have different “perceptions” of how they view their credit. Some think that since they missed a payment to a department store, that their credit sucks. Others think that they have good credit because they pay all their bills thru a credit-counseling agency.

The true indicator is their credit score. And, it all depends on the loan program the borrower applies for and their credit score requirements. The very minimum is 620 (and that’s not that good). Lenders love high credit scores (720+) and will be more liberal when it comes to approving the loan.

4. The House Must Appraise for the Sale Price!

What a lender wants to know is -- if the borrower cannot make their monthly payments and they have to foreclose, will the lender be able to sell the home and recover the balance owed on the loan. That’s why you see lenders “balk” at unusual properties (earth homes) or require repairs to be made before closing.

Pictures are a critical factor—including interior photos! So if the sellers have repairs to do, or they’re in the middle of remodeling, it’s best to get it done before the appraiser visits—or it could affect the value.

There are Thousands of Variables! No client will ever “fit” into the neat little square holes—or be the absolute perfect borrower. That’s where a great lender (that’s me) will pre-approve prospective buyers to make sure there are no surprises at the closing table.

Any questions? Let's discuss them.