With a mortgage loan application, there are four specific areas that are considered when making the determination as to whether the loan will be approved or not. I like to consider these areas the four pillars of a loan application. The reason is that each of these four areas is unique, but equally important, to the loan application. If one of these pillars is weak or non-existent, the application becomes unstable, much like a weak leg on a table, and the application stands the chance of not being approved. So, let’s look at these four specific areas:
First, let’s look at income. Obviously for a loan application, the borrowers need to demonstrate the ability to repay the loan through the income that they will earn while the loan is outstanding. Since there is no way to predict the future, the method that is used is to look at the past and then use that information to determine the probability and stability of what the future might look like. As a result, it is typically necessary to have a minimum two-year work history to be eligible to apply for a mortgage loan. I say typical since there are instances where that is not the case, such as with a recent college graduate or recently discharged service member. In those instances, if the applicant has acquired a job in the field in which they were trained, we can use the history of their training to determine the probability of their future income. Income can come in many forms and many of those forms have different ways of calculating what the monthly income is to be. The one constant, however, is that the income used for a mortgage application is always an applicant’s gross income.
The second pillar is credit history and obligations. Since the applicant is applying to borrow money, it only makes sense to look at how this individual has performed on previous borrowed money obligations. As the mortgage lender, we obtain all three credit scores and use the middle score as the best indication of the applicant’s creditworthiness. Along with this, we collect the cumulative amount of monthly debt the applicant has and add that to the proposed payment for the new mortgage loan. This is done to determine how much of an applicant’s income is going to be applied toward debts and if it makes since to assume that the applicant can pay back the debt that they have incurred.
The third pillar deals with assets, more specifically, liquid cash assets that are available to the applicant. Many mortgage products require that the applicant invest some of their own cash into the purchase. This is typically seen in the form of a down payment and/or closing costs. However, there are products that have very minimal requirements or that do not require a down payment. However, all products do require that the applicant have a certain amount of liquid cash reserves that could be used if the applicant needs to at some point in the future.
Finally is the collateral, or in other words, the home itself and its value. This is normally determined by having an appraisal done on the property to determine the home’s value at the time of purchase. However, with modern times and the easy collection of recent data, there are times when an appraisal is not required due to comparing the terms of the sale of a home to the data that has been collected of other homes sold in the area. If that data supports the sale price of the contracted home, it may be determined that an appraisal is not required. QCBN
By Mick Szoka
Mick Szoka can be reached at 928-220-3504 or email@example.com. Union Home Mortgage is located at 325 W. Gurley St, Suite 104, in Prescott.