Main Qualifying Factors for Refinancing

There are 3 main qualifying factors used to qualify apresent more risk to the lender. What if the
borrower for a mortgage loan: EQUITY, INCOME andborrower takes a new job for less money? What if
CREDIT.they become unemployed?
Everyone seems to be so concerned with the* Low disposable income: This ties in to the DTI%.
interest rate on their loan and how to get the lowestDisposable income is what the borrower has left
one possible. The answer is simple. Interest rate isafter all the reported monthly obligations are paid.
directly related to ….RISK. If you want toRemember, this has to cover utilities, automobile,
lower interest rate, eliminate the risk of the loan totaxes, groceries, etc. None of those expenses are
the lender. Lenders look at risk based on the samefigured into the DTI%. Low disposable income
three qualifying factors: Equity, income and credit.indicates the borrower is probably over-extended and
Equity Risk Factors:thus presents a riskier lending scenario.
* Limited or no equity = High LTV %: the mortgage* Unemployed/ laid off borrower: Obviously, if the
loan is secured by the equity in the property. If theborrower doesn't have a job or a way to pay back
property has little or no equity, it is a riskier loan forthe loan, it presents a high level of risk for the lender.
the lender.Credit Risk Factors:
* Poor marketability: If you are financing a unique* Late payments on the current or past mortgage
property such as a log cabin or a home bigger oraccounts: The mortgage lender is most concerned
smaller than the homes in the area it affects thewith how the borrower has paid the mortgage loans
marketability of the home. In addition, mobile homesin the past. If they have late payments in the past
or manufactured homes have marketability issues ason mortgage accounts, it is a good indication that it
well.may happen again in the future- showing a level of
* Short residential history: If you have not lived in therisk to the lender.
property very long, you have very little vested in it.* Late payments on other accounts: After the
You haven't paid down the loan much, and now youmortgage accounts, lenders look at the other debt
are trying to finance it again. This could be addingobligations to see how the borrower has paid those.
debt on top of debt and is looked at as risky by theAlthough not often weighted as heavily as the
lender.mortgages, late payments on other account still
* Lack of comparable sales supporting value: Ifaffect the level of risk inherent with issuing a
homes are not selling in the area, it is a risky loan tomortgage to that borrower.
do. If the borrower defaults on the mortgage loan,* Derogatory Accounts: Derogatory accounts include
the lender may have trouble recouping the costs andforeclosures, bankruptcies, charge offs and
investment they made into the loan.collections. If the borrower has had these issues in
Income Risk Factors:the past, the lender must weigh the level of risk and
* Low Income = High DTI%: If the borrower doesn'tthe probability that it could happen again in the future.
make much money or has bills that account for too* Low Credit Scores: This is an indicator that the
much of the income that is received, it is a risky loanborrower has had some overall credit problems in the
for the lender. The borrower may have to beginpast. The lender will only lend certain amounts based
making choices of which bill to pay.on the various credit scores.
* Difficult to verify: There are many cases where a* Lack of credit history: Lenders like to see a pattern
borrower may make plenty of money, but it isof good payment history on the credit report. If the
difficult to actually verify the money they bring in.borrower has little or no credit, the lender may want
Such is the case with many self-employed borrowers.the borrower to establish a good payment history on
To take advantage of tax laws, self-employedother accounts before taking the risk in issuing a
borrowers write off as much income by way ofmortgage loan.
expenses as they can. This helps them avoid* High balances compared to limits: This typically
overpaying taxes. It hurts them, however, whenshows that the borrower is over-extended and living
trying to qualify for a mortgage loan.on credit. For obvious reasons, this is risky for the
* Short employment history or gaps in employment:lender. Usually, it is only a matter of time before the
The lender wants to know with reasonable suretyborrower will start getting behind on those payments,
that the employment the borrower has now whileespecially if they do not change the lifestyle to live
qualifying for the loan will remain in place. Job hopperswithin their means.
or borrowers who show periods of unemployment