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Step 7c: Getting Qualified for Financing

Take One
the home appraisal
qualifying income ratios
your employment
your rights upon submission
notes on home equity closing
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Step7b: Understanding Escrow
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Qualifying for a Mortgage Loan

Lenders use several criteria to qualify a home buyer
for a mortgage loan. The most important criteria
include the following:

  1. the home appraisal
  2. your credit rating (discussed in Step 1)
  3. your capacity to repay the loan (income ratios)
  4. your employment

The Home Appraisal

  • Lenders will not extend you a $200,000 loan to buy a house if comparable homes within the neighborhood are valued at $150,000.

    Regardless of what you are willing to pay for the home, lenders would be taking a sizable risk if you defaulted on the loan.

  • That is why lenders complete a home appraisal before they qualify any mortgage loan amount.

  • Most lenders qualify loan amounts at 80% LTV, which means that they will underwrite a loan that is 80% of the appraised or purchase value of the home (whichever is lesser in most cases).

    This requires the home buyer to raise the other 20% — your down payment.

    we have an LTV calculator that estimates your required down payment

  • The 80% LTV rule protects the bank in the event of market declines. The 80/20 rule also forces the home buyer to have some vested interest in their real estate purchase.

    With a 20% equity position, home buyers are more likely to keep the home value up by making repairs and improvements.

  • There are some mortgage products that allow lenders to lower the 80/20 rule — meaning that the lender will approve loan amounts at 85%, 90%LTV or more.

    These loans are generally government sponsored programs that insures the bank from loss in the event of a default. Click for product information at:

    Lenders will also extend loans at levels greater than 80% if the home buyer obtains mortgage insurance. See our notes on mortgage insurance.

  • We have additional information about home appraisals:

    What's it worth? Order your personal home valuation report:
    get your home price at
    view sample report: click here

    Find the value of an existing or future homes:

    Check neighborhood prices:

Qualifying Income Ratios

  • Your capacity to repay the mortgage loan is an important factor for lending institutions to qualify an applicant for a mortgage loan.

  • If capacity ratios are too high, you will need to change one of the following parameters in order to qualify for a mortgage loan:

    • reduce your borrowed amount
    • increase your amount of down payment
    • qualify for a mortgage loan that has a lower rate
    • apply for federal assistance sponsored loans
    • increase your income
    • pay off outstanding debts

  • The total cost of your mortgage loan (PITI) will be used to calculate these ratios. See our discussion on PITI.

Lenders use two debt ratios:

1: The "housing ratio": calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

    • mortgage loan payment on your new home including interest and principal
    • real estate taxes
    • hazardous insurance
    • private Mortgage Insurance, if any
    • other mortgage related insurance
    • homeowner's association dues
    • ground keeping fees
    • property leases
    • other special assessments and financing

Monthly Income includes the following:

    • employment income
    • overtime bonuses and commissions
    • net self employment income
    • alimony, child support and income from public assistance
    • social security, retirement, and VA benefits
    • workman's compensation or permanent disability payments
    • interest and dividend income
    • income from trust, partnerships, etc.
    • net rental income

Housing Ratio Calculator:
Input the following data to calculate your housing ratio:

If you don't have your real estate tax or insurance figures, the American Housing Survey shows that the median taxes paid averaged $12 per $1,000 in home value. The property insurance paid averaged $30 per month.

You can lookup your property tax assessments by community:

Private Mortgage Insurance (PMI) will be required if your down payment is less than 20% of the home purchase price. Your PMI monthly cost will average 0.005 of the borrowed amount divided by 12.

For a discussion on real estate taxes and insurance, plus calculating your monthly mortgage and escrow payments, see our escrow payment notes


Enter the estimated monthly mortgage payment or enter your loan parameters below:

Mortgage loan amount:
Number of months to repay:
Home mortgage loan rate (APR):

Click here for a blended sample of regional mortgage rates
Estimated Taxes per Month:
Estimated Insurance per Month:
Estimated Other Expenses per Month:

Total Monthly Income:

Housing Ratio (should be around 28%): %

2: The "debt-to-income ratio": calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What are your fixed monthly expenses:

    • monthly housing expenses included above
    • monthly installment loan payments
    • monthly revolving credit line payments
    • real estate loan payment on non-income producing property
    • alimony and child support
    • any tax or legal assessments.

Debt-to-Income Ratio Calculator:
Input the following data to calculate your housing ratio:

Estimated Total Housing Expense (from above):
Est. Total Monthly Installment Loan Payments:
Est. Total Monthly Revolving Credit Line Payments:
Est. Monthly R. Estate Non-Income Loan Payments:
Est. Monthly Alimony and Child Support Payments:
Est. Monthly Tax and Legal Assessments:
Est. Monthly Other Payments:

Total Monthly Income (from above):

Debt-to-Income Ratio (should be around 36%): %

Your Employment

  • Your capacity to repay the mortgage loan is contingent on your employment and the income it produces.

    Lenders like to see mortgage applicants in steady jobs with verifiable income.

  • Lenders will likely call your employer to verify your employment position and salary/wages.

    Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for a mortgage loan.

  • Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income

    These documents will include your personal tax filings and other information as required.

Your Rights Upon Submission

The following information was obtained from the Federal Consumer Information Center

Buying Your Home: Settlement Costs and Helpful Information

RESPA Disclosures:

  • RESPA disclosures help consumers become better shoppers for settlement services. RESPA requires that borrowers receive disclosures at various times.

  • These disclosures lists the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

Good Faith Estimate of Settlement Costs:

  • RESPA requires that within the next three business days after submission of your mortgage application, the lender or mortgage broker must provide you a Good Faith Estimate of settlement service charges you will likely have to pay.

  • Note that the amounts listed on the Good Faith Estimate are only estimates. Actual costs may vary at time of closing.

Servicing Disclosure Statement:

  • RESPA requires the lender or mortgage broker to tell you in writing, when you apply for a loan or within the next three business days, whether it expects that someone else will be servicing your loan (collecting your payments).

Affiliated Business Arrangements:

  • When a lender, real estate broker, or other participant in your settlement refers you to an affiliate for a settlement service, RESPA requires the referring party to give you an Affiliated Business Arrangement Disclosure.

  • Affiliates are businesses that are owned or controlled by the parent company, such as the lender, real estate broker, or other involved in your settlement. You are not required to use these affiliates and under certain circumstances, you are free to shop for other providers.

HUD-1 Settlement Statement:

  • One business day before the settlement, you have the right to inspect The HUD-1 Settlement Statement itemizes the services provided to you and the fees charged to you. This form is filled out by the settlement agent or attorney who will conduct the settlement.

  • You have the right to inspect this statement one business day before settlement. Be sure you have the name, address, and telephone number of the settlement agent if you wish to inspect this form.

Escrow Account Operation & Disclosures:

  • Your lender may require an escrow account for the prompt payment of taxes and insurance premiums. To start the escrow account, you will probably an initial amount and a cushion to ensure that the lender has enough money to make the payments when due. RESPA limits the amount of the cushion to a maximum of two months of escrow payments.

  • Your lender or servicer is required to review the escrow account annually and send you a disclosure each year which shows the prior year's activity and any adjustments necessary in the escrow payments that you will make in the forthcoming year.

Mortgage Submission Protection Laws

There are several federal laws which provide you with protection during the processing of your loan. The Equal Credit Opportunity Act ("ECOA"), the Fair Housing Act, and the Fair Credit Reporting Act ("FCRA") prohibit discrimination and provide you with the right to certain credit information.

  • No Discrimination. ECOA prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, the fact that all or part of the applicant's income comes from any public assistance program, or the fact that the applicant has exercised any right under any federal consumer credit protection law. To help government agencies monitor ECOA compliance, your lender or mortgage broker must request certain information regarding your race, sex, marital status and age when taking your loan application.

    The Fair Housing Act also prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status or national origin. This prohibition applies to both the sale of a home to you and the decision by a lender to give you a loan to help pay for that home. Finally, your locality or state may also have a law which prohibits discrimination.

  • Prompt Action/Notification of Action Taken. Your lender or mortgage broker must act on your application and inform you of the action taken no later than 30 days after it receives your completed application. Your application will not be considered complete, and the 30 day period will not begin, until you provide to your lender or mortgage broker all of the material and information requested.

  • Statement of Reasons for Denial. If your application is denied, ECOA requires your lender or mortgage broker to give you a statement of the specific reasons why it denied your application or tell you how you can obtain such a statement. The notice will also tell you which federal agency to contact if you think the lender or mortgage broker has illegally discriminated against you.

  • Obtaining Your Credit Report. The Fair Credit Reporting Act ("FCRA") requires a lender or mortgage broker that denies your loan application to tell you whether it based its decision on information contained in your credit report. If that information was a reason for the denial, the notice will tell you where you can get a free copy of the credit report. You have the right to dispute the accuracy or completeness of any information in your credit report. If you dispute any information, the credit reporting agency that prepared the report must investigate free of charge and notify you of the results of the investigation.

  • Obtaining Your Appraisal. The lender needs to know if the value of your home is enough to secure the loan. To get this information, the lender typically hires an appraiser, who gives a professional opinion about the value of your home. ECOA requires your lender or mortgage broker to tell you that you have a right to get a copy of the appraisal report. The notice will also tell you how and when you can ask for a copy.

  • Prohibited Fees. It is illegal under RESPA for anyone to pay or receive a fee, kickback or anything of value because they agree to refer settlement service business to a particular person or organization. For example, your mortgage lender may not pay your real estate broker $250 for referring you to the lender. It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add to a third party's fee, such as an appraisal fee, and keep the difference.

  • Permitted Payments. RESPA does not prevent title companies, mortgage brokers, appraisers, attorneys, settlement/closing agents and others, who actually perform a service in connection with the mortgage loan or the settlement, from being paid for the reasonable value of their work. If a participant in your settlement appears to be taking a fee without having done any work, you should advise that person or company of the RESPA referral fee prohibitions. You may also speak with your attorney or complain to a regulator listed in the Appendix to this Booklet

  • Penalties. It is a crime for someone to pay or receive an illegal referral fee. The penalty can be a fine, imprisonment or both. You may be entitled to recover three times the amount of the charge for any settlement service by bringing a private lawsuit. If you are successful, the court may also award you court costs and your attorney's fees.

Notes: Closing on a Home Equity Product

Home Equity Product:

  • Once homeowners raise their required down payment, they have little extra cash available to complete home improvement projects on their new home.

  • These projects include: home repair, furniture purchases, landscape design, kitchen renovation, etc.

  • Some homeowners will borrow against their down equity to reinvest these funds back into the home.

  • For more information about 100% LTV home equity product for new homeowners:

Closing Benefits:
  • Closing a home equity carries similar costs as with closing a home mortgage.

  • These costs include: title search, title insurance, appraisal, loan preparation, etc.

  • Since many of these same tasks must be completed to close a home mortgage, many lenders will bundle a home equity product under that same closing procedures without incurring any additional closing costs.

  • As consumers, you can save time and money by requesting that your lender add a home equity product to your mortgage closing.

Interest Rates:

  • Home equity interest rates can vary depending on your type of home equity product (loan or line) and your LTV position.

  • Homeowners who borrow their full down equity will borrow up to 100% LTV. These rates are typically higher than for homeowners who borrow at 80%LTV or lower.

  • For information about LTV position, visit our sister site:

Home Equity Submission:

  • If you desire to process and close your home equity along with your mortgage loan, request from your lender to bundle a home equity product with your mortgage application.

    Begin your application submission!

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