Many things in the mortgage industry have changed and evolved throughout the years. One aspect of the mortgage loan process that continues to stay the same is how mortgage loans are underwritten.
When a borrower is looking to get approved for a mortgage, the Income-Equity-Credit Triangle is the key component in their ability to qualify. This is essentially a systematic approach as to how the income, equity in the home, and credit history is treated when a mortgage lender is rendering a credit decision and is broken down into the following components:
- Debt-to-Income ratio. This is calculated by dividing the borrower’s monthly household debt by their gross monthly income.
- Loan-to-value. This is calculated by dividing the loan amount by the value of the property. This shows the owner’s equity stake in the property. The lower the Loan-to-Value the better.
- Credit Score.he mortgage loan officer will use the middle of the borrower’s three credit scores, as they are reported by Experian, Equifax, and TransUnion. Credit score requirements vary by loan product.
When all three of these requirements are satisfied and balanced, a mortgage approval is generated. However, this process will not be the same for every applicant which is why there are compensating factors to take into consideration. Compensating factors are known to be the strengths in a person’s application that help outweigh the weaknesses.
An example of this would be if the borrower had very low income, but their credit and Loan-to-Value are phenomenal it is likely that it will still get approved in underwriting. Although compensating factors are unofficial, it could be the deciding factor of getting your mortgage loan approved.
For more information about compensating factors or to better understand how mortgage loan approvals are determined, give us a call at (760) 930-0569.