Lenders will not approve you for a $200,000 line to build a house if comparable homes and land values within the area are valued at $120,000 or less

Regardless of what you are willing to pay for the home, lenders would be taking a sizable risk if you defaulted on the loan.

That is why lenders complete a home appraisal before they qualify any mortgage loan amount. The appraisal must be comparable with similar homes in the surrounding neighborhood.

Most lenders qualify loan amounts at 80% LTV,

which means that they will underwrite a loan that is 80% of the appraised or purchase value of the home (whichever is lesser in most cases).

This requires the home buyer to raise the other 20% — your down payment.

we have an LTV calculator that estimates your required down payment

(links to our home mortgage center)

The 80% LTV rule protects the bank in the event of market declines. The 80/20 rule also forces the home buyer to have some vested interest in their real estate purchase.

With a 20% equity position, home buyers are more likely to keep the home value up by making repairs and improvements.

There are some mortgage products that allow lenders to lower the 80/20 rule

meaning that the lender will approve loan amounts at 85%, 90%LTV or more.

Banks view these loans as more risky and will charge higher rates and/or points to underwrite the loan.

You can view more information about low-down mortgage loans

(links to our home mortgage center)


Lenders will also extend loans at levels greater than 80% if the home buyer obtains mortgage insurance. See our notes on mortgage insurance.

(links to our home mortgage center)

View more information about home appraisals:
see our market valuation page

Your credit report is used by banks and other lending institutions to determine your credit worthiness.

The report lists any payment delinquencies that you may have had over the past three years.

While information regarding your credit habits for the last three years appears on your credit report, no adverse credit information, with the exception for bankruptcy, may be kept on file for more than seven years.

The report can be a factor in a lending institution's decision to approve or decline your mortgage application.

You should review your credit report for any errors before applying for a mortgage.

Lending institutions review the following information from your credit report to determine your creditworthiness:

— your current outstanding debt
— places and number of times you've applied for credit
— the kind of credit you have taken out in the past
— late payments
— over extension of your credit lines
— liens
— garnishments
— bankruptcy

You need a credit history of at least one year to ensure a good credit report.

A credit score determines the rate the lender may charge you. The credit score estimates your ability to repay a loan as evidenced by your credit history.

Lenders will sometimes give you a better mortgage rate based on a good credit report.

Further, a lending institution is less likely to be concerned over an occasional late mortgage payment if you have a good credit report rather than a fair credit report.

Establishing a good credit report can payoff in lower rates and better mortgage management.

For more information: link to our affiliated credit module for credit report information, repair, and management:

credit reporting module

(links to our credit management center)

Your capacity to repay the mortgage loan is an important factor for lending institutions to qualify an applicant for a mortgage loan.

If capacity ratios are too high, you will need to change one of the following parameters in order to qualify for a mortgage loan:

• reduce your borrowed amount
• increase your amount of down payment
• qualify for a mortgage loan that has a lower rate
• apply for federal assistance sponsored loans
• increase your income
• pay off outstanding debts
  
  The total cost of your mortgage loan (PITI) will be used to calculate these ratios. See our discussion on PITI
  

Lenders use two debt ratios

1: The "housing ratio": calculated by dividing monthly housing expenses by your gross monthly income. As a basic rule, the housing ratio should not exceed 28%.

What are your monthly housing expenses:

• mortgage loan payment on your new home including interest and principal
• real estate taxes
• hazardous insurance
• private Mortgage Insurance, if any
• other mortgage related insurance
• homeowner's association dues
• ground keeping fees
• property leases
• other special assessments and financing
  

Monthly Income includes the following:

• employment income
• overtime bonuses and commissions
• net self employment income
• alimony, child support and income from public assistance
• social security, retirement, and VA benefits
• workman's compensation or permanent disability payments
• interest and dividend income
• income from trust, partnerships, etc.
• net rental income

Housing Ratio Calculator
Input the following data to calculate your housing ratio:

If you don't have your real estate tax or insurance figures, the American Housing Survey at www.census.gov
shows that the median taxes paid averaged $10 per $1,000 in home value. The property insurance paid averaged $30 per month.

You can lookup your property tax assessments by community: www.statelocalgov.net

Private Mortgage Insurance (PMI) will be required if your down payment is less than 20% of the home purchase price. Your PMI monthly cost will average 0.005 of the borrowed amount divided by 12.

For a discussion on real estate taxes and insurance, plus calculating your monthly mortgage and escrow payments, see our escrow payment notes

use this calculator to calculate the monthly expense from an annual amount     =
Enter the estimated monthly mortgage payment or enter your loan parameters below: Mortgage loan amount: Number of months to repay: Mortgage loan rate (APR): %
Estimated Taxes per Month:
Estimated Insurance per Month:
Estimated Other Expenses per Month:
Total Monthly Income:
Housing Ratio (should be around 28%):	%

2: The "debt-to-income ratio" calculated by dividing your fixed monthly expenses by your gross monthly income. As a basic rule, debt ratio should not exceed 36%.

What are your fixed monthly expenses:

• monthly housing expenses included above
• monthly installment loan payments
• monthly revolving credit line payments
• real estate loan payment on non-income producing property
• alimony and child support
• any tax or legal assessments.

Debt-to-Income Ratio Calculator
Input the following data to calculate your housing ratio:

Estimated Total Housing Expense (from above):
Est. Total Monthly Installment Loan Payments:
Est. Total Monthly Revolving Credit Line Payments:
Est. Monthly R. Estate Non-Income Loan Payments:
Est. Monthly Alimony and Child Support Payments:
Est. Monthly Tax and Legal Assessments:
Est. Monthly Other Payments:
Total Monthly Income (from above):
Debt-to-Income Ratio (approx. 36% or less):	%

Your capacity to repay the mortgage loan is contingent on your employment and other income sources.

Lenders like to see mortgage applicants in steady jobs with verifiable income.

Lenders will likely call your employer to verify your employment position and salary/wages.

Any discrepancy in your reported employment and income may raise additional questions that can disqualify you for a mortgage loan.

Self-employed individuals will require additional documents to ensure lenders that the applicant has steady income

These documents will include your personal tax filings and other information as required.

see items required for submitting your application