Mortgage qualification is the screening process for determining if a potential borrower will be able to repay the loan being requested.
Qualification should not be confused with pre-approval.
A pre-approved home loan is a lender’s commitment to lend to a borrower. While there’s no commitment in a qualification as qualified borrowers can still eventually have their loan request turned down.
This is often due to poor credit records.
Sometimes it is also known as pre-qualification.
But that makes absolutely no sense as it basically means to qualify a prospective borrower to see whether he is qualified for qualification.
But for the sake of clarity, know that pre-qualification and qualification refers to the same thing.
One of the most critical factors to assessment is whether the borrower has a personal income sufficient enough to service the mortgage debt that he is applying for.
And lenders do this by running a number of ratios based on variables provided by the borrower:
- Housing expense ratio
- Total expense ratio
- Debt ratio
The objective of the borrower to conduct these protocols is to ascertain and measure whether the borrower has an income that is strong enough to obtain a housing loan.
And if so, how much can his net income support?
However, it must be noted that different lenders might, and most probably will, have their own set of standards and variations on how these ratio are formulated.
And they will have their own tolerance levels that determine how high or low a ratio is that makes it strong or weak.
This also implies that a borrower who has only slightly failed to qualify with a specific lender, he could very well be qualified with another with less stringent criteria.
One sure way of raising the threshold of these ratios is to contribute a larger down payment.
No lender would penalize a borrower for that sort of gesture.
Nevertheless, should the borrower still fail to stay within the compound of acceptable ratios, the numbers can be reduced by either:
- Lengthening the term
- Pay a larger down payment
- Pay off other debt liabilities
Down payment is the most powerful action a borrower can make to have a lender view him more seriously.
However, it is also the single factor that denies people from buying homes.
It’s no exaggeration to say that most people has an income that enables them to service a mortgage debt. The problem is that they have no cash on hand for the down payment!
But that’s a discussion for another days. Let’s move on.
Then there is also the alternative of raising income.
If all expenses and debt remain the same, then the logical other option to raise income so as to reduce the results of these ratios.
This can be done by:
- Submitting a new job contract with significantly higher salary
- Submit documents of leasing contracts to prove rental income
- Pulling in a co-borrower with considerable annual income
Wisdom tells us that we should not jump into buying a house when we cannot afford it. And for most people, there is no need for ratios to determine whether they can or cannot afford a house.
If you are not comfortable in buying a house you are targeting, it might be better to find a cheaper house or wait until your income is strong enough to easily serve the mortgage that comes with it.