Lenders Qualifying Factors
A potential buyer's income must be:
Stable. If a buyer has frequent or recent job changes, he or she must provide sufficient, justifiable explanations
Obtained from an acceptable source. Employment, child support, alimony or maintenance payment, income from rental properties, or investment income are examples of acceptable income sources
Verifiable. Income must be verified, for income from sources other than employment, lenders frequently require two years tax returns and possibly other supporting documents.
- Installment debts, such as car loans
- Revolving account balances, including credit cards
- Monthly child support, alimony, or maintenance payments
The ratio of liabilities to income, debt ratio, is one of the calculations used by lenders to determine buyer's ability to repay a loan. There are two debt ratios used to determine if a buyer's income is sufficient to cover his or her debts.
Housing expense ratio: Permits no more than 28% of buyer's gross monthly income towards monthly housing costs, (PITI) Principal, Interest, Taxes and Insurance. This ratio is calculated by dividing total monthly housing expense (PITI) by total monthly gross income.
Debt to income ratio: 36% of buyer's gross monthly income, to cover housing cost and long term debts. This ratio is calculated by dividing total monthly housing expense (PITI) plust other monthly debts by total monthly gross income.
Percentage used above are rule-of-thumb and subject to change by lenders, please contact a lender for assistance in qualifying for a mortgage.
- Assets must be from an acceptable and verifiable source
- Lenders will look for a pattern in buyer's accumulated assets, such as a stable saving plan.
- Buyers must have sufficient funds to make the down payment, pay prepaid items, and closing costs
- Some lenders may require cash reserves.
A credit report will be obtained from a licensed credit bureau; the importance of the report is to demonstrate buyer's willingness to repay a loan. If the report reflects late payments, past due accounts, collections, judgments, or bankruptcies, these problems must be fully explained.
Any serious problem in the past, such as a bankruptcy, does not necessarily disqualify a buyer if he or she can show a sufficient time of good stable credit, after the bankruptcy or other problem is discharged.
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