Loan Qualification Process and Criteria
Pre-qualified for a loan means that based on general financial observations or certain criteria, you appear to be eligible for a specific type(s) of loan. For example, a veteran is pre-qualified for a VA loan. Pre-qualified is not the same as pre-approved, and neither is a guarantee to lend.
- Qualifying for a Loan
Qualifying for a loan is the general process of establishing where the borrower stands financially and how best to proceed with the application process. It may be based on precise data or on no more than your (the borrower’s) interpretation of their situation. The borrower will give as much information as they can (such as, I make $60,000 a year, I have a small family, and my credit is around 640, etc.) and based off of this your loan officer will tell you which types of loans it sounds like you qualify for (an FHA loan, for instance) and they will explain a little about each type of loan.
Some of the things your Loan Officer will want to consider during the qualification process are:
- The loan programs available for you
One of the first things your loan officer should do is determine your wants and needs to see which lender programs will be available for you. Another way of looking at this is, which lender’s policies and guidelines will your loan transaction conform to.
The secondary market already has established guidelines that serve as general rules for what types of loan transactions can be purchased or sold on the secondary market. Some mortgage bankers will only deal with applicants who qualify for loans that fit within these particular guidelines. During the qualifying stage of the loan process, your loan officer will roughly gage whether or not loan programs with secondary market standards are available for you.
Portfolio lenders are typically more flexible. They may be more familiar with the economic stresses on a particular region, or be more accommodating to individual’s circumstances. Because portfolio lenders generally hold their loans, they are not as concerned about whether or not a specific loan meets the criteria for sale on the secondary market. While your initial qualifying assessment may suggest that you do not qualify for loan programs that are structured according to secondary market guidelines, you may still qualify for a loan program with a portfolio lender.
- Your debt to income ratio
A debt to income ratio is a measure of your debt compared to your income, expressed as a percent.
A housing ratio, or front-end ratio, is created by dividing the total housing expense for a month (taxes, insurance, primary payment, associated fees, etc.) by the total monthly income. For instance, if you make $4,500 a month and your mortgage housing expenses are estimated at $1,200, your housing ratio is approximately 26%. The secondary market guideline for this figure is 28%. A housing debt ratio above 28% may not qualify for loan programs that have secondary market guidelines.
A total debt ratio, or back end ratio, is found by taking the total debt amount for one month and dividing by the total monthly income. The secondary market guideline for this figure is 36%.
As this is still the qualifying phase of the process and no hard data has been gathered or verified, all ratios and numbers used here are treated as estimates. Once a lender has verified your information via a formal application process, an underwriter will determine the final figures.
- Your credit history
- Any compensating factors
Some lenders will place less importance on the debt to income ratio if there are compensating factors, such as a high credit score or a low loan to value ratio on the mortgage.
The loan officer (LO) is responsible for identifying obstacles that might make it difficult for you to obtain a loan, while explaining all of your options, requesting the necessary documents and information, and adhering to the guidelines of a responsible lender.
If your loan transaction does not conform to a lender’s general policies and requirements, your loan application will not be approved. It is therefore important that your loan officer communicate openly with you during this initial phase, stressing the fact that further review may limit or increase your options. Ideally, lenders will have policies in place that guide the loan officer when dealing with both common and unusual financial situations.
Remember, qualifying for a loan is not a guarantee that you will be approved for a loan.
When it comes to getting a mortgage
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