Chapter 4:       How Do I Qualify For a Mortgage?

In general, all lenders use the same four basic standards (capacity, character, capital and collateral) to approve applicants for a mortgage.  

Capacity (Income)

Do you have steady and sufficient income to make the monthly payments? This income can come from a primary, second, or part-time job(s), overtime and bonuses, commissions, self-employment, retirement benefits, pensions and annuities, public assistance, child support, alimony or maintenance payments, veteran's benefits, disability payments or rental property income.  In most cases, you need to provide documentation regarding your income. Alimony and child support need not be noted unless you want to have them included as the basis for repayment of the debt.  Lenders are looking for stable, ongoing sources of income.  One-time bonuses or occasional overtime are not seen as favorably as income that has continued over a period of time and can be expected to continue into the future.

Character (Credit History)

Have you paid back money you borrowed in the past?  Have you been late in making your payments?  Have you filed for bankruptcy?  Do you have a record of judgments and collection accounts filed?  Some lenders do offer special products for homebuyers with past credit problems.  If you have a limited or no credit history, a "nontraditional" credit history will be considered.  You may need to show paid receipts and canceled checks for rent and utility payments that document a pattern of paying your monthly obligations on time.

Your past financial history is very important because it indicates your willingness and ability to handle the increased financial responsibility of repaying your home loan.

Capital (Savings)

Have you saved any money that can be used toward the purchase of your home? The savings can be money in a savings account, certificate of deposit, retirement [401(k)] account, or a gift from a relative or friend.  A lender wants to see that you have the capital to fulfill your current obligations as well as your new mortgage.

Collateral (Property)

Your lender will require an appraisal on the home you wish to purchase home to determine its market value.  Your lender will also look at the type of the property you intend to buy and whether there are additional costs such as homeowner's association dues.

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