One of the most misunderstood aspects of Mortgage Banking is how lenders qualify prospective borrowers. It is a unique issue, to say the least. The same company that is trying to win over your business as a customer by providing terrific service and customer satisfaction, is also bombarding you with requests for bank statements, W-2’s, pay stubs, credit explanations, and anything else that they can think of to make sure that you will pay their loan back accordingly. It is this unique irony that sometimes drives consumers crazy when dealing with lenders. Just when you think you have found the greatest lending institution in the world, they will almost always ask for something that the uneducated borrower will not understand or appreciate. These types of issues are what keep mortgage banking CEOs up at night.

The purpose of this section is to educate you upfront about what will be expected of you with most lending institutions around the country. The type of information and documentation that a lender will collect may vary somewhat from company to company, but since the vast majority of loans end up being backed by the Federal National Mortgage Association (FNMA/Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac) the qualifying guidelines throughout the country are generally standardized.

Fannie Mae & Freddie Mac are government-sponsored corporations that act as the secondary mortgage market for banks. They ultimately provide the final funding for many loans. Each holds its own standards and guidelines for which it will accept and fund loans. Together they play a large role in determining the way that banks qualify. We hope here to paint a broad picture of what it is that lenders will be looking for so that when you sit down for your application you have done the preliminary work to eliminate most, if not all, of the surprises.

There are four main categories that a bank will review when they qualify you for mortgage financing, otherwise known as the four pillars of qualifying. They are:

• Income. When we discuss income, we will always refer to an individual’s gross income before they pay out taxes or social security or make any pre-tax contributions such as benefit premiums or 401K plan contributions. Income may come in many forms and from many different sources. The source of the income will determine what the bank will need to verify that income.
• Assets. Simply put, the bank wants to confirm that you have enough money to close on the house and that you have not borrowed the money for the down payment. For this reason, the bank will generally ask for one or two months of bank statements on all your asset accounts. This is so the bank can review the statements to see not only that the funds are there, but that there are also no large deposits in the accounts that may represent a loan of one form or another.
• Credit. Credit is probably the most scrutinized issue of qualifying that the bank will review. Not only does it indicate if a customer has a pattern of being late on financial obligations, but it gives an overall perspective to the bank of how seriously the potential customer takes his credit responsibility.
• Debt. There are several different kinds of debts that the lender will take into consideration, including Installment Debt (including car loans or student loans), Revolving Debt (for things like credit cards), and Mortgage Debt (for any additional property).