Qualifying for a Mortgage Loan
Written by Daphne Tai, Gloria Zhu   


Before you purchase your dream house, you may want to figure out if you are “pre-qualified” for a loan. Mortgage lenders will consider the following:
  • Your Credit Score
  • Your Gross Income each month
  • Your Down Payment

Credit Score

The higher your credit score ranks, the better mortgage deal you can get. A credit score is a number that helps lenders predict how likely you are going to make your payments on time. Lenders usually refer to the FICO® score, the most commonly used scoring system developed by Fair Isaac Corporation. FICO scores range from 300 to 850. Lenders generally consider a score higher than 700 as indicating a solid creditworthiness and a stable financial background. A score lower than 600, on the other hand, flags a warning sign. Low credit score could possibly lead to higher rates the lender charges you, or even worse, disqualify you from getting approved for your mortgage application.


Monthly Gross Income

Your monthly income will be evaluated to determine your ability to make consistent and regular repayments. The appraisal on your monthly gross income could be conducted through the calculation of your Debt-to-Income ratio. One measure of your debt-to-income ratio is called “Front-End” Ratio. This measure determines approximately how much of your pre-tax income will go into your monthly payment. The benchmark is usually around 28% of your gross monthly income. We also call this measure as Total Monthly Lender Payment. The following is the calculation:

Gross Monthly Income x 0.28 = Maximum Housing Expense per month

There is another measure for your debt-to-income ratio that is called “Back-End Ratio.” It calculates the amount of your total gross income that will go into all of your other obligations, such as mortgage, credit card bills, other loans, and debts. And the benchmark for this measure is usually no greater than 36% of your gross income. This measure can be treated like Total Monthly Debt Payment.

Annual Salary x 0.36 / 12 (months of the year) = Maximum Allowable Debt-to-income Ratio

As long as your total gross income meets one of the two incomes ratios stated above, you will probably qualify. However, it’s always better to meet both of the ratios if it’s possible.


Down Payment

The down payment is the initial upfront portion of your total amount due and it is usually given in cast at the time of finalizing transaction.

The purpose of down payment is to protect the lender against your default. In the United States, down payments for home purchases usually vary between 5% and 20% of the purchase price. But if you are going to borrow more than 80% of the home's value (paying less than 20% down payment), you will have to pay a price for this option. You will usually need to pay private mortgage insurance at a cost of 0.5% to 1% of the loan value. If you wait to save up to 20% down payment, you can avoid these extra costs, qualify for a lower-rate loan and keep your monthly mortgage payments much lower.



 
Last Updated on Wednesday, 16 February 2011 13:42