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Qualifying for a Mortgage
Even though underwriting is done mainly by computers nowadays, the fact that everyone’s personal finances are different is taken into account. This happens because of the enormity of personal information that is plugged into the equation. There are a few main things that are asked of everyone, the first being gross monthly income from a main source of employment. Other types of income are also considered, but they must be verifiable and reliable. By reliable, I mean that they will be an ongoing income source for the next five years.
Next, debt is looked at. This goes far beyond just how much you owe total. Who the creditor is, what your monthly payments are, and how much time you have left to pay the debt off are also looked at. When considering credit card debt, lenders assume that you will pay off 5% of the card at a time. The lender will undoubtedly want to know what your past long-term credit history is like. This is one of the most important factors in qualifying for your loan. Bad credit may mean no mortgage, unfortunately.
Of course, the amount of cold, hard cash you have is also looked at. The lender wants to know if you have enough to cover the down payment and closing fees. They also want to know where the cash is. Is it under your mattress? In a bank? In the stock market? How easily is it accessible? Another important question the lender will ask is if there will be any money left over once closing costs are paid. They want to know that you will be able to make payments on the loan with ease.
With a conventional loan, the magic number is 28%. What this means, is banks are looking to see if the monthly payment on the loan is more or less than 28% of your gross monthly income. If you have other debt, it should account for no more than 8% of your gross monthly income, for a total of 36% of income going to cover debt.
All of the above information is programmed into a computer, and after a few minutes, whether your loan application is approved or not is determined. If you are approved, the interest rate you are able to handle is determined by the computer system.
If you are deemed ineligible, don’t fret. This only means that you are not eligible through Fannie Mae or the other Federal mortgage agencies. It is still possible to get a mortgage, albeit more difficult. A good lender will find a way around this, whether it be recommending a different type of loan, or reapplying through a different agency. Often, world wide web based lenders will deem a borrower ineligible only to have the same borrower approved by Fannie Mae later on. Persistence is necessary.
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