Monday, April 24, 2006

Qualifying Criteria

During the mortgage application process, also known as origination, a lender normally takes precautions to ensure that a potential borrower will be able to consistently make payments and therefore avoid financial loss for either party. This means that there may be certain criteria which must be met by the mortgage applicant. Under normal circumstances, the lender will require certain financial documents in conjunction with the application, such as proof of income/employment, a credit report and score, and tax returns. From these documents, a lender will be able to determine past credit history and history of stable employment and income.

Preferably, a borrower's housing expenses should not exceed 25 to 35 percent of their total income, after combining payments for mortgage, property taxes and homeowner's insurance.

Also, any other outstanding debt is normally taken into consideration as well.

Now available are "No Doc" and "Low Doc" mortgages which require minimal financial documentation on the part of the borrower in exchange for a slightly higher interest rate. This type of mortgage is most likely made possible for those borrowers with good credit standing.

For those with bad credit or questionable credit history, sometimes mortgages considered "subprime" can be extended to the borrower. This simply means that a higher interest rate is required due to the higher risk for mortgage default.