One of the first things your loan officer should do with respect to mortgage qualification 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.
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.