Qualifying for a Loan

How to Qualify for a Home Loan

There are many different factors that need to be considered when qualifying for a loan. Investors want to be assured that the borrowers will pay as agreed and not default on payments. Lenders will consider the loan-to-value, credit score, income documentation, and debt ratio when qualifying you for a loan program. The more documentation that you can show will qualify you for more programs.Income Documentation

There are three main types of income documentation; full doc, simple doc, stated doc. The three types also vary according to self employed workers as oppose to wage earner workers. Full documentation is having and being able to show all of your income. This will include; paystub, W2, and Tax Returns. Simple documentation is using 6 months of bank statements to analyze income deposits. Most mortgage lenders will add up the deposits from the last 6 months according to bank statements and then average them out. Stated documentation is stating an income without verifying it. No verification is needed for this type of documentation.

Keep in mind that the more documentation you can show, the more money you will save on your loan. This applies to both income documentation and also other documents needed for a loan.

Debt Ratio

As a mortgage lender, they have a responsibility to provide homeowners with a loan they can afford. This is why each program has a maximum debt ratio which must be met. Depending on the type of program, the debt ratio needs to be under 65%, 50%, or 35%. This means that all of your revolving, installment, and mortgage payment together cannot exceed the debt ratio guideline of your monthly income.

Example:
Credit card payment: $300
Car loan: $400
Mortgage Payment: $1500
Total Payment $2200
To qualify for a loan program with 50% debt ratio, all of the borrower’s income needs to add up to at least $4400.

Risk Factor

Qualifying for interest rates and home loan programs are determined by risk factor. A borrower is given a risk grade which is a determination of credit score, loan-to-value, and probability that consumers will pay as agreed. Credit scoring is reflected on a credit report which provides credit grantors the ability to quantify the risk of extending credit.

Loan to Value

Refinance is most beneficial when there is equity to use in the property. Equity determines the “loan to value” (LTV), the total of all liens on a property as it relates to the appraised value of the property. When the loan-to-value is relatively low, this reduces the risk to the lender, therefore qualifying you for low risk programs.

Income Documentation

There are three main types of income documentation; full doc, simple doc, stated doc. The three types also vary according to self employed workers as opposed to wage earning workers. Full documentation means having and being able to show all of your income. This will include; paystub, W2, and Tax Returns. Simple documentation is using 6 months of bank statements to analyze income deposits. Most mortgage lender swill add up the deposits from the last 6 months according to bank statements and then average them out.

Stated documentation is stating an income without verifying it. No verification is needed for this type of documentation.Keep in mind that the more documentation you can show, the more money you will save on your loan. This applies to both income documentation and also other documents needed for a loan.

Debt Ratio

As a mortgage lender, they have a responsibility to provide homeowners with a loan they can afford. This is why each program has a maximum debt ratio which must be met. Depending on the type of program, the debt ratio needs to be under 65%, 50%, or 35%. This means that all of your revolving, installment, and mortgage payment together cannot exceed the debt ratio guideline of your monthly income.

Example:
Credit card payment: $300
Car loan: $400
Mortgage Payment: $1500
Total Payment $2200
To qualify for a loan program with 50% debt ratio, all of the borrower’s income needs to add up to at least $4400.