How to Get Qualified for a Home Loan

Posted on November 22, 2009
Filed Under Home Buying | Leave a Comment

Tips for Successfully Qualifying for a Home Loan

Although the process of applying for a home mortgage loan can seem intimidating or daunting at times, successfully qualifying for a home loan is easy once you have a good understanding of how your income and preexisting debts will figure into the equation.

A lender will typically base its decision on how much it will lend to you on a comparison of how much income you earn and how much you owe to other creditors.

Calculating your gross monthly income

Your first step in the process will be to ascertain what your before-tax, or gross, monthly income is. In figuring this amount, you should include all regular and recurring gross income that you can prove you receive. If you do not have proper documentation or otherwise cannot demonstrate, through your tax return, that you have received income from a particular source, then it typically cannot be used as a basis for qualifying you for a mortgage loan.

However, you can submit documentation of income that you did not earn in a traditional fashion, such as alimony paid to you by an ex-wife, or gambling or lottery winnings, and that income will be fully considered in connection with your application.

Finally, any income-producing assets such as rented real estate, stocks or bonds can be estimated and used in this income analysis. Of course, if you are uncertain about a particular item of income or whether it should be included, a competent loan officer can provide guidance to you on this issue.

Calculating your monthly debt service

The second step in the loan application process is to determine your monthly debt load. In conducting this analysis, you will include all recurring monthly debt obligations, such as credit cards, installment loans, automobile loans, personal debts or any other ongoing monthly obligation like alimony or child support. If you are including revolving debt from, for example, credit card purchases, you should always use the minimum monthly payment for this calculation, rather than the total balance due to the credit card company.

Similarly, if you are including installment debt, you should include the current monthly payment, rather than any payoff amount, in order to calculate your debt load properly. Significantly, if a debt is scheduled to be paid in full within six months’ time, you need not include that obligation at all in your calculation. When you total up all of your monthly debt obligations, the resulting figure is called your “monthly debt service.”

Understanding how lenders arrive at loan amounts

Not surprisingly, most reputable lenders do not want for you to burden yourself with a loan obligation that will make it impossible for you to repay all of the creditors to whom you are obligated or to put food on your family’s table. Although lenders use different methods and formulae to arrive at loan amounts for their customers, the following will provide you with a general understanding of how lenders “crunch” the pertinent numbers.

Monthly Housing Expense

From a lender’s perspective, your monthly housing expense – that is, your mortgage payment, 1/12 of your annual real estate tax burden and 1/12 of your homeowner’s insurance bill – should not be in excess of approximately 28% of your gross monthly income. If you are uncertain as to what your real estate tax and insurance burden will be, it is safe to estimate that about 15% of your payment will cover these expenses. The remaining 85% or so will be used for repayment of principal and interest.

Total Monthly Debt

Also, your proposed monthly housing expense (mortgage payment, 1/12 of taxes and 1/12 of insurance) and your total monthly debt service combined should not be in excess of around 36% of your gross monthly income. If your monthly housing expense and debt service exceeds this number, your loan application is likely to exceed the lender’s underwriting regulations, with the result that your loan may be denied.

There Are Exceptions

Of course, as is the case with much in life, there are exceptions. Your personal financial situation may result in your being afforded either more or less flexibility in the 28% and 36% guidelines.

For example, if you are capable of making a sizable cash down payment to purchase your home and, by doing so, you need to borrow less than 80% of the home’s appraised value, the qualifying ratios will tend to carry less significance.

Similarly, if you have an extremely creditworthy co-signer on the loan, lenders will be far less concerned with the percentage guidelines discussed above.

Keep in mind that there are many types of home loan programs and products that are available in today’s market, and the regulations and guidelines for each often differ. For this reason, your dream home may be more of a reality than you ever thought possible.

Conclusion

Finally, it is important to remember that you are the master of your domain with regard to a variety of factors that can affect your monthly payment.

By way of example, there are adjustable rate loans available, which offer a much lower initial payment than fixed rate loans tend to offer. Similarly, if you are in a position to make a more sizeable down payment, you can lower your anticipated monthly payment substantially.

Ultimately, your best bet is to do your homework by communicating with and investigating numerous lenders in the market to find a home loan program that works best for you.