For as strict as mortgage underwriting can be, it may seem as if there's a magic formula for getting approved. There's not. Getting approved for a home loan is the same as it ever was -- just with higher hurdles.
Satisfy the Mortgage Income-Equity-Credit Triangle and everything else is cream cheese.
The Big 3: Income, Equity, Credit
To get approved for any type of mortgage -- conforming, FHA, jumbo, VA or otherwise -- you'll need to show income, equity and credit. It's that simple, really.
Income, Equity and Credit are mortgage lending's Big 3.
- Income : Your monthly taxable income versus your monthly household debt (i.e. DTI).
- Equity : The percentage of equity you have in your home (i.e. LTV).
- Credit : The middle of your three scores, as reported by Experian, Equifax, and TransUnion.
For each mortgage product available, mortgage applicants must meet some minimum qualification in each of the Big 3. When all 3 factors are in balance, the approval "bullseye" is in plain view, and a mortgage approval is likely.
Hitting The Mortgage Approval Bullseye
The ideal mortgage applicant for a bank will have strong income, big equity, and great credit. In reality, though, not every applicant will. And, that's okay, too.
It's because of something known as "compensating factors".
Compensating factors are strengths in a person's mortgage application that, literally, compensate for weakness in the same.
For example, if a person's income levels are low but, at the same time, they have stellar credit and loads of equity, it's likely they'll be approved in underwriting.
This example is illustrated at right.
The Income-Equity-Triangle is shorter at its top because of low income, but wider at its base because of credit and equity. It's the compensating factors (i.e. credit and equity) that keep the "bullseye" in view, resulting in approval.
When You Don't Have Compensating Factors
Compensating factors are limited to income, credit and equity; you can't use them for "employment history", for example. For this reason, few applicants have legitimate compensation factors.
Without compensating factors, mortgage approvals are tougher to come by.
For example, if we look at the same applicant from above -- low income but without stellar credit and without big amounts of equity -- the mortgage application gets a turndown. The base of that Income-Equity-Credit Triangle can't widen, so the bullseye breaks the plane of the triangle, resulting in a loan denial.
Loan approvals are scarcer for another reason, too. In recent months, with Fannie Mae and Freddie Mac holding banks responsible for bad loans, underwriters less willing to stick their respective necks out. If a loan doesn't meet strict approval standards, it can be turned down on the spot.
Need A Mortgage Approval ASAP? Get One Now.
The problem with compensating factors is that they're unofficial; they're a bit of common sense injected into an otherwise sterile mortgage lending process. You may not even know if they've been used on your file.
To get a mortgage approval for your upcoming home purchase or refinance, call me at 615-426-3182 or click here for an online rate quote. The rate quote will start the process. You can see my rates and see how they work for you.
About the Author
Shawn Kaplan is an active, multi-state Licensed loan officer with Access National Mortgage. He enjoys helping his real estate agents not only close loans but grow business.