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Getting Qualified

Every lender Uses Their Own Credit Criteria
when qualifying applicants for credit. Your credit report and score are important parameters, but so are other factors that may include the following:
(you can learn more - links scroll to information below)
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Getting Qualified:

Start With a Good Credit Rating

Applicants with a good credit report will be in a stronger position to negotiate best rate and terms

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.

 

The report can be a factor in a lending institution's decision to approve or decline your loan application.

You should review your credit report for any errors before submitting your application.

You can find more information about checking your credit:
check your 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
— late payments
— over extension of your credit lines
— liens
— garnishments
— bankruptcy

 

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 lending 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.


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Getting Qualified:

Check Your Credit Score

Do you know your FICO credit score?

FICO scores range from 375 to 900 points. Applicants with a high FICO score generally receive the best rate and terms.

You can get your score and credit report using our credit monitoring services


FICO Scores 700 and up

Scores 700 and up considered excellent. Most lenders will categorized this group as A rating.

Scores within this group will have access to the best interest rates and terms.

About 60% of the U.S. population falls within this credit range.


FICO Scores 600 to 699

Scores 600 to 699 are considered good credit. Most lenders will categorized this group as B rating.

Scores within this group will have access to good interest rates, but may not qualify for the very best interest rates and terms.

About 27% of the U.S. population falls within this credit range.


FICO Scores 500 to 599

Scores 500 to 599 are considered risky credit. Most lenders will categorized this group as C rating.

Scores within this group may still qualify for a loan, but may have to pay at least two percentage points or more higher that the group in the excellent category.

About 12% of the U.S. population falls within this credit range.


FICO Scores 499 and Less

Scores 499 and below are considered very risky credit.

Most lenders will categorized this group as D rating — which means the applicant may have foreclosure, liens, and credit judgments.

Scores within this group may still be eligible for a loan, but may have to pay at the maximized rates determined by State and Federal regulations.

About 1% of the U.S. population falls within this credit range.

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Getting Qualified:

Qualifying Income Ratios

Your capacity to repay the loan is an important factor for lending institutions to qualify an applicant for a loan.

If capacity ratios are too high, the application will be rejected unless the applicant changes one of the following:

  • reduces their borrowed amount
  • increases their amount of down payment
  • qualifies for a loan with a lower rate
  • applies for federal assistance sponsored loans
  • increases their income
  • pays off or consolidates outstanding debts

    note that one of the following debts that can hurt first-time home mortgage applicants is multiple student loan debt

    you can consolidate outstanding student loans into one low payment that can improve your income ratio: click to our student loan consolidation center to see if you qualify


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:

    • mortgage loan payment on your new 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 financings

Monthly Income includes the following:

    • 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

Housing Ratio Calculator
Input the following data to calculate your housing ratio:

If you don't have your real estate tax or insurance figures, the American Housing Survey shows that the median taxes paid averaged $10 per $1,000 in home value. The property insurance paid averaged $30 per month.

You can lookup your property tax assessments by community: www.statelocalgov.net

Private Mortgage Insurance (PMI) will be required if your down payment is less than 20% of the home purchase price. Your PMI monthly cost will average 0.005 of the borrowed amount divided by 12.

For a discussion on real estate taxes and insurance, plus calculating your monthly mortgage and escrow payments, see our escrow payment notes

housing ratio

Lenders use two ratios to qualify your request mortgage loan amount:

  1. housing ratio
  2. debt-to-income ratio

The "housing ratio" is calculated by dividing monthly housing expenses by your gross monthly income. The housing ratio should not exceed 28%.

The "debt-to-income ratio" is calculated by dividing your fixed monthly debt expenses (including the mortgage payment) by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.


Step 1:
Calculate Your Housing Ratio

The "housing ratio" is calculated by dividing monthly housing expenses by your gross monthly income. The housing ratio should not exceed 28%.

Monthly housing expenses includes real estate taxes, insurance, etc. If you don't have your real estate tax or insurance figures, the American Housing Survey shows that the median taxes paid averaged $12 per $1,000 in home value (divided by 12 months). The property insurance paid averaged $30 per month.

You may contact your local community and county officials to determine your true county and city tax factor:

You can lookup your property tax assessments by community: www.statelocalgov.net

Private Mortgage Insurance (PMI) will be required if your down payment is less than 20% of the home purchase price. Your PMI monthly cost will average 0.005 of the borrowed amount divided by 12.

If you fail to pass either ratio, you may need to adjust your loan request to bring your ratios within approved levels.


  use this calculator to calculate the monthly expense from an annual expense
 
  =  
   

Enter the estimated monthly mortgage payment or loan parameters below (calculated):

Mortgage loan amount:
Number of months to repay:
Home mortgage loan rate (APR): %
 
Estimated Taxes per Month
(annual assessment divided by 12):
Estimated Insurance per Month
(annual premium divided by 12):
Estimated Other Expenses per Month:

Total Gross Monthly Income:


Housing Ratio
(should be around 28% or less):
%

Step 2:
Calculate Your Debt-to-Income Ratio

The "debt-to-income ratio" is calculated by dividing your fixed monthly debt expenses (including the mortgage payment) by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.


Estimated Total Housing Expense (from above):
Total Monthly Installment Loan Payments
(auto, student, other):
Total Monthly Credit Line Payments
(credit cards, credit lines):
Monthly R. Estate Non-Income Loan Payments:
Monthly Alimony and Child Support Payments:
Monthly Tax and Legal Assessments:
Monthly Other Payments:

Total Monthly Income (from above):


Debt-Income Ratio
(should be around 36%):
%

Debt Ratio Barometer:

  • 36% or less:
    debt level within acceptable range for most people.

  • 37%-42%:
    debt level a little high, need to take corrective action to bring debt level down. You may consider paying off or consolidating some of your debt.

  • 43%-50%:
    danger level, need to take immediate action before you lose control of your financial situation.

  • 50% or more:
    excessive debt loan, may need to seek credit counseling services.

* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. Your actual mortgage lending rate may vary depending on your credit quality and lender. The circumstances surrounding your credit and loan qualifications may result in different calculations.
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Getting Qualified:

Having an Appraisal

The appraisal sets a value to the asset that may be used to secure your loan

Loans such as home mortgages, home equities, auto loans, and other asset-based loans are secured loans.

These loans are "secured" by the asset value of the property that the loan is helping you to buy.

Many lenders will require an independent appraisal to ascertain the true value of the asset before lending you the money.



Lenders will not extend you a $200,000 loan to buy a house

if comparable homes within the neighborhood 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 appraisal before they qualify any mortgage loan amount. The appraisal must be comparable with similar homes in the surrounding neighborhood.



Many 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 asset (whichever is lesser in most cases).

This requires the applicant to raise the other 20% — your down payment.

The 80% LTV rule protects the bank in the event of market declines. The 80/20 rule also forces the borrower to have some vested interest in their asset purchase whether that be a home, an auto, or other real estate or investment.



There are some loan products that allow lenders to lower the 80/20 rule

meaning that the lender will approve loan amounts at 85%, 90%LTV or more.

These loans are generally government sponsored programs that insures the bank from loss in the event of a default.

More information about neighborhood and home values:
see our market valuation page


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Getting Qualified:

Check Your References

Having a Good Reference or Secured Job Gives Lenders the Confidence That You Will Pay Back Your Loan

Some lenders may require a reference check before they qualify you for a loan.

They may check your employment, your school, or other background. Your capacity to repay the loan (especially mortgage loans) is continqent on your employment and other income sources.

Lenders like to see loan 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 loan.

Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income.


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