For a borrower to procure a mortgage, he must meet certain preset criteria. These criteria vary based upon the mortgage program chosen and the lender chosen. However, there are certain criteria that are across the board for most mortgage products. With a basic understanding of these criteria, a borrower can have a good idea of his ability to qualify for a mortgage prior to the application process.
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A mortgage is typically the largest debt a borrower will ever face in his lifetime. With this in mind, a lender is very thorough when approving a borrower for such a debt. The entire financial picture of the borrower is analysed, from his credit history to his current assets and liabilities.
Certain criteria are preset based upon the loan itself. One such criterion is the debt to income ratio, which quickly shows a lender a snapshot of the borrower's current debt situation and how it would be impacted by the new debt. In most cases, this ratio should be 36 per cent or less, meaning that 36 per cent of the borrower's pre-tax income is being used for debt repayment.
A borrower's past financial situation is analysed through his credit report, which is a reflection of his credit history. His credit score is pulled within three months of the application date. The credit score is a numerical representation of a borrower's ability and willingness to repay his current and past debts. If the score is too low, typically below 620, the borrower is automatically denied the new debt.
A down payment is needed for most mortgage programs. However, with a USDA or VA mortgage, no down payment is needed. Special restrictions are in tact for both programs. The two programs that most borrowers can qualify for, FHA and conventional mortgages, both require down payments. An FHA mortgage requires a 3.5 per cent down payment while a conventional mortgage requires a 5 per cent minimum down payment.
A credit score high enough to meet the program's regulations does not mean an automatic loan approval. The credit report must also meet certain requirements. For instance, if the borrower has had a 30-day late payment on any mortgage in the past year, he must wait another full year before procuring another mortgage debt. Additionally, he will not be able to close until all tax liens and judgments are paid in full.
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