What does it mean to qualify for a mortgage loan program?

What does it mean to qualify for a mortgage loan program?

When a mortgage loan officer talks about a mortgage loan programs, they are taking about the different types of mortgages. Each mortgage program Fixed or ARMS have different and strict requirements or loan parameters you must meet. The guidelines include a minimum: Credit Score, income, assets and down payments or loan to value - in order to qualify for the loan programs offered, unless you and your loan officer can show compensating factors and have an “exception” granted for one of the factors that are not in the minimum loan program requirements.
Fixed rate mortgages, loans with rates that are fixed for the life of the loan have some of the most stringent requirements. The longer you ask the bank to lend you money at a fixed rate, the higher the cost is to you and the stricter the banks requirements are to qualify for the loan program.
Credit Score – A lower (than 620 in most cases) credit score will disqualify you from a fixed rate mortgage at application (exception - FHA).
Debt to Income, or DTI. – There is a front end and back end DTI. The “front-end” debt to income for a fixed rate loan needs to be about 36 % or less, exception FHA. This amount is your proposed monthly housing expenses (principal, interest, property taxes, any common charges for condo or co-ops and homeowner’s insurance) divided by your gross monthly income. The “back-end” DTI includes your monthly housing expense, plus all other debts on your credit report, divided by your gross income. Fixed rate loan programs back end DTI needs to be about 45% or lower exception FHA. Again, exception for compensating factors – such as you have assets that exceed your loan amount.
FHA loans, which are available to all borrowers, not just first time home buyers – have lower credit score requirements (580 or higher) and allow higher DTI – up to 50% with compensating factors. .

Loan to Value, or LTV ratio - The down payment initially determines your LTV. If you put 20% down, your loan to value ratio will be 80 percent. If you put 10 % down, your loan-to-value is only 90 percent. Less than 20 % down, you may have the option of a second mortgage to reach the desired 80 percent loan-to-value ratio or you’ll likely have to pay at least a one time mortgage insurance premium, or an annual policy with monthly premium to protect the lender should you default. Exception, there are loans with lender paid premiums which is a cost to you in a higher loan rate.
Compensating factors – these are circumstances that allow the underwriter to grant an approval to a loan with numbers that do not meet the minimum loan guide lines. Working with a loan officer who will take the time to ask you to tell your story with regard to any compensating factors that affect your Credit Score, Income, Assets or property type can make the difference in getting you the right loan for your long and short term financial needs and goals.