Factors that can influence getting a mortgage loan

The mantra for mortgage shopping is simple: Focus on the loan, not the lender. Concern yourself with interest rates, points, processing costs and other variables that affect the cost of the loan. Don’t worry much about where the lender is located—your mortgage will be sold once or twice before you’re done, anyway. Study the pros and cons of fixed-rate and adjustable- rate borrowing. Learn the lingo so you can ask the questions that lead you to the best deal. This chapter will help you. 

Before you can worry about comparing mortgages, you need to worry about qualifying in the first place. How will lenders evaluate your application? The answer is pretty much the same wherever you live. Lenders want to play by the rules set by Fannie Mae (the Federal National Mortgage Association), or Freddie Mac (the Federal Home Loan Mortgage Corp.). These government-sponsored organizations buy up mortgages from lenders, repackage them as securities and then resell them to investors .

By selling their mortgages to Fannie Mae or Freddie Mac, lenders convert their loans to cash, with which they can make more loans. Fannie and Freddie insist that the mortgages they buy meet certain standards, which lenders are anxious to meet. If they don’t, they risk being unable to sell their loans and thus re- 89 T plenish their supply of lendable cash.

Fannie Mae measures your borrowing power by matching your projected housing expenses to your household income. Principal and interest payments, property taxes and homeowners insurance—what lenders refer to as PITI—should total no more than 28% of your gross monthly income. And that monthly house payment plus other debts with ten or more monthly payments still outstanding (that could include automobile or student loans) should total no more than 36% of your gross income.

Gross income is what you and your spouse earn before taxes for work that you have been doing for a year or longer. Income from the extra job you took a few weeks before applying for the loan doesn’t count. Other income—such as bonuses, commissions and overtime pay—must be averaged over two years to be considered wages. You can count alimony and childsupport payments as income if the payments will continue for at least three years from the date of your loan application.

Not all loans get the straight 28/36 treatment. To qualify for certain adjustable-rate mortgages (ARMs), you’ll be expected to meet stricter requirements for the first year’s payments because they are typically lower than second and subsequent years’ payments. Loans with low down payments also draw tougher scrutiny. On the other hand, a down payment of 20% or more may earn you a 33/38 ratio instead of 28/36. FHA and VA mortgages also get higher ratios because they are backed by the federal government.

Debt ratios are only guidelines, and 30% to 40% of the loans Fannie Mae buys exceed the guidelines because other factors can tip the scales. It counts in your favor if you have a good credit history, make a substantial down payment, possess liquid assets equal to at least three months of home payments, or have in the past paid a large proportion of your income for rent or toward a mortgage.