THE 4 ELEMENTS OF A LOAN APPLICATION


1. Income
A borrower must show through verification that he has stable and sufficient income to support the proposed loan payment as well as his other monthly obligations. The borrower’s income must be such that the payments fall within prescribed ratios for a particular program. For example, on a Conventional loan, generally the house payment, including principal, interest, tax and insurances, must not exceed 33% of the borrower’s gross monthly income. The borrower’s total obligations including the proposed house payment and any other monthly obligations (such as installment loan payments, minimum balance payments on credit card, child support, etc.) may not exceed 38% of the borrower’s gross monthly income. On a FHA loan, these ratios are 29% and 41%.

Two years of employment history on a job or occupation is usually required. The form of the income is looked at carefully: derived from hourly wages, salary, hours and/or overtime, commissions, incentives, etc. In addition to the more common forms of income, some other sources of income considered in the qualifying process are:

  • part-time income – if proper stability is demonstrated
  • retirement income
  • Social Security income
  • alimony and child support – proof of receipt is necessary
  • notes receivable
  • interest and dividend income
  • rental income

Common forms of income we are not able to use for qualifying purposes are:

  • auto allowances
  • expense account income
  • income from roommates or boarders
  • other unverifiable income sources

2. Credit History & Credit Score
Regardless the size of the mortgage loan, the amount and quality of your credit is a major factor in obtaining financing. A Credit Score is a snapshot of your credit at a particular time, reflected as a number between 300 and 850. Scores are compiled with information from the following categories (listed in weighted order of importance):

  • payment history
  • amount owed to creditors vs. total amount of available credit
  • length of credit history
  • new credit opened and used
  • types of credit in use

3. Asset Verification
The lender will check written verification that the borrower has adequate funds to close the transaction. The lender will check for the balance of the down payment, closing costs and prepaid expenses, as well as any cash reserves that a particular program may require. Typical forms of these liquid assets are:

  • earnest money – source of funds must be shown
  • checking and savings accounts
  • stocks and bonds
  • borrowed funds – secured by a real asset
  • equity from existing home
  • sale of a real asset – must be verifiable
  • gift funds – must be a bona fide gift and the ability of the donor to give the gift must be shown
  • bridge loans
  • secondary financing

In most cases the following sources of funds are not acceptable:

  • cash on hand
  • sweat equity
  • in the case of a rent/purchase situation, only the difference between market rent and actual rent can be applied toward down payment

4. Appraisal
The property used as collateral for the loan must fall within the guidelines prescribed by a particular program, for example, the property must have sufficient value to warrant a loan. The appraisal, however, is not a guarantee for the buyer, in respect to function or future value of the home. Aspects of value, such as location, neighborhood, zoning and age, are applied to the property in the determination of value.
The greatest emphasis in determining the value of a property is the Market Approach or comp system.
The Market Approach is a comparison of the subject property to a series of comparable properties (“comps”). Values of comps are adjusted to the subject property based on various parameters and must meet certain requirements (there are exceptions):

  • sold and closed
  • proximity to subject – usually within one mile
  • similar sales price and price per square foot
  • should be less than six months old
  • similar type of home, i.e., style, living area, room count, etc.