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About Mortgage Qualification

by Arnold Kling

Our qualification calculator makes two separate calculations.

Down payment

We start by assuming a minimum down payment of 5 percent, and that your savings funds will have to cover closing costs as well as the down payment. You can override the default requirement of a 5 percent down payment when you recalculate.

If the calculator shows that you are constrained by the down payment, there are a number of options. FHA, VA and some private mortgage insurance companies allow a lower down payment. Also, you will find that by saving up for a while you can really increase the size of the home you can purchase.

It is a good idea to put down 20 percent if you find it possible to do so for the house that you wish to buy. However, 20 percent is a "nice-to-have" as opposed to a "must have." I have seen estimates that over 1/4 of all mortgages go to borrowers with lower down payments.

Many people get very upset with the down payment arithmetic used in the calculator. One typical reaction was your qualification calculator is pathetic. If you have $5000 in savings and the down payment requirement is 5 percent, then the arithmetic says that the house price will not be over $100,000 (because some of your savings has to go toward closing costs.) If you think that you can afford more, change the closing cost percentage, lower the down payment requirement, or increase what you enter for your savings. All of these options are easy to change when you use the calculator. There is no need to take offense at the arithmetic.

Income and Debt Ratio

Mortgage qualification, or mortgage underwriting, is a pseudo-science. The mortgage lender is trying to determine whether or not you can and will meet the payments on the mortgage. Because no one can predict exactly who will meet the payments and who will default, mistakes will be made. Some "good" borrowers will be turned down, and some "bad" borrowers will receive loans.

What this means to you as a borrower is that your application for mortgage credit will be evaluated according to some rules of thumb that appear to be precise, such as "the ratio of your monthly payment to your income should not exceed 28 percent," or "the ratio of your monthly payment plus monthly non-housing debt to your income should not exceed 36 percent." However, everyone knows that these rules of thumb are not completely accurate.

Because the rules of thumb are simplistic, lenders are not rigid in using them. On the one hand, you can "pass the test" of having enough income to satisfy the 28/36 percent ratios and still get turned down for a mortgage loan. On the other hand, you may "fail" to meet the test and still have your application accepted. These exceptions are discussed below.

Risk Factors

Factors that could disqualify a borrower who "passes" the simple ratio test include:

Qualifying in spite of a high ratio

On the other hand, do not be discouraged if the prequalification calculator does not show that you can obtain as large a loan as you would like. Lenders will try as hard as they can to meet your needs. Among the options that they have are:


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