What's Needed to Qualify
Lenders Use Several Criteria
to qualify an applicant for financing. The most important criteria include:
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The Home Appraisal
Lenders will not approve you for a $300,000 line to build a house if comparable homes and land values within the area are valued at $120,000 or less
Regardless of what you are willing to pay for the home, lenders would be taking a sizable risk if you defaulted on the loan.
That is why lenders complete a home (land) appraisal before they qualify any mortgage loan amount. The appraisal must be comparable with similar homes in the surrounding neighborhood.
Most lenders qualify loan amounts at 80% LTV,
which means that they will underwrite a loan that is 80% of the appraised or purchase value of the home (whichever is lesser in most cases).
This requires the home buyer to raise the other 20% your down payment.
we have an LTV calculator that estimates your required down payment
The 80% LTV rule protects the bank in the event of market declines. The 80/20 rule also forces the home buyer to have some vested interest in their real estate purchase.
With a 20% equity position, home buyers are more likely to keep the home value up by making repairs and improvements.
There are some mortgage products that allow lenders to lower the 80/20 rule
meaning that the lender will approve loan amounts at 85%, 90%LTV or more.
Banks view these loans as more risky and will charge higher rates and/or points to underwrite the loan.
You can view more information about low-down mortgage loans
Lenders will also extend loans at levels greater than 80% if the home buyer obtains mortgage insurance.
Your Credit Rating
Your credit report is used by banks and other lending institutions to determine your credit worthiness.
The report lists any payment delinquencies that you may have had over the past three years.
While information regarding your credit habits for the last three years appears on your credit report, no adverse credit information, with the exception for bankruptcy, may be kept on file for more than seven years.
Note that if you try to check your credit score, be careful when you do so online because identity thieves are all over the internet. The identity protection experts at LifeLock recommend that you look for "https" in the URL instead of "http" before entering personal information on a webpage.
The report can be a factor in a lending institution's decision to approve or decline your equity line application.
You should review your credit report for any errors before applying for a equity line: see checking credit report
Lending institutions review the following information from your credit report to determine your creditworthiness:
your current outstanding debt
places and number of times you've applied for credit
the kind of credit you have taken out in the past
over extension of your credit lines
You need a credit history of at least one year to ensure a good credit report.
A credit score determines the rate the lender may charge you. The credit score estimates your ability to repay a loan as evidenced by your credit history.
Lenders will sometimes give you a better rate based on a good credit report.
Further, a lending institution is less likely to be concerned over an occasional late payment if you have a good credit report rather than a fair credit report.
Establishing a good credit report can payoff in lower rates and better loan management.
For more information: link to our affiliated credit module for credit report information, repair, and management:
credit reporting module
Your Capacity to Repay (Income Ratios)
Your capacity to repay the mortgage loan is an important factor for lending institutions to qualify an applicant for a loan.
If capacity ratios are too high, you will need to change one of the following parameters in order to qualify:
- reduce your borrowed amount
- increase your amount of down payment
- qualify for a mortgage loan that has a lower rate
- apply for federal assistance sponsored loans
- increase your income
- pay off outstanding debts
The total cost of your mortgage loan (PITI) will be used to calculate these ratios. See our discussion on PITI
Lenders use two debt ratios
1: The "housing ratio": calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.
What are your monthly housing expenses:
- current mortgage loan payment on your home including interest and principal
- real estate taxes
- hazardous insurance
- private Mortgage Insurance, if any
- other mortgage related insurance
- homeowner's association dues
- ground keeping fees
- property leases
- other special assessments and financing
Monthly Income includes the following:
- gross employment income
- overtime bonuses and commissions
- net self employment income
- alimony, child support and income from public assistance
- social security, retirement, and VA benefits
- workman's compensation or permanent disability payments
- interest and dividend income
- income from trust, partnerships, etc.
- net rental income
click here to print the comparison sheet to shop lenders
Your capacity to repay the mortgage loan is contingent on your employment and other income sources.
Lenders like to see mortgage applicants in steady jobs with verifiable income.
Lenders will likely call your employer to verify your employment position and salary/wages.
Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for a mortgage loan.
Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income
These documents will include your personal tax filings and other information as required.
see items required for submitting your application
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