Can You Pass the A.C.I.D Test?

February 4, 2018


So you're thinking of buying a new home.  There are 4 key factors to determine if you can qualify for a mortgage and for how much.  Fail one of these and you'll be stuck living where you are until you can pass the test.  Current home owners should not assume that they can get a mortgage for a new home. They too must pass this test - again.



A - ASSETS  Does the buyer have sufficient assets for the down payment, closing costs, and mortgage payments for a couple of months?  Assets refers to cash, near cash (think stocks) and long-term assets that can be turned into cash like other property.  The amount of assets required depends on many factors but the main two are the loan product and the price of the house.


C - CREDIT  Is the buyer's credit score at or above the minimum for the loan product and is the credit report free of judgements that would interfere with the purchase?  Though there are exceptions, most buyers can buy a home with a credit score of at least 620.  A higher score may be required if there is a bankruptcy or foreclosure.  The credit score is a measure of credit risk.  The higher the score the lower the risk.  The credit report is a record of current and past debt activity.


I - INCOME  Does the buyer have enough income to pay the mortgage and their other living expenses?  The lender will compare the buyer's income to debts to determine if they have enough income to support a mortgage.  The buyer's income should be sufficiently consistant month-to-month.  Hourly wages and overtime are adjusted to determine the average monthly income.


D - DEBT  What are the buyer's debt obligations and does the buyer have enough income to pay the debt after paying the mortgage?  Lender's apply a ration to answer this question.  Generally, a buyer's debt should be less than 30% of their income (before considering the mortgage).  The debt referred to is the debt that effects your credit report.  For example, credit cards, student loans, car loans, etc.  Expenses such as cell phones bills and utility bills are not reported on the credit report so they are not included in the ratio.  If the debt to income ratio is higher than allowed for the loan product the loan will be denied, regardless of the amount of income.




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