Mortgage Calculator Risk Factors

Mortgage calculators are generally based on standard guidelines that lenders use to determine loan amounts that borrowers are eligible to receive.  The factors used by most lenders to determine how much money may be financed include income, total mortgage payments, total debt payments, loan amount, interest rates, down payment amount and the credit profile of the borrower.

Basically, the mortgage calculators are evaluating numbers.  There are however, factors that can disqualify a customer that the mortgage calculators cannot evaluate.  Poor credit history is clearly the most obvious.  Credit is predominantly determined by the borrower’s credit score ( the score is convenient for lending since it reduces decision making to a number ).  The credit score is important to qualify for a loan; it is not the only credit criteria however.  Even with a good credit score, if a borrower has a previous bankruptcy or mortgage default, lenders will be reluctant to grant a new mortgage.  These are factors that are often only evaluated during the underwriting phase of the mortgage application and cannot be determined by a mortgage calculator.  Obtaining your credit report in advance gives you time to challenge missing information, errors, or other discrepancies if necessary.  Do not overlook the importance of investigating your credit profile; errors in credit reporting is common and repairing damaged credit may be somewhat easier than many people believe.

Though, income of the borrower is measured fairly easily at any one point in time and used as a variable to input into a mortgage payment calculator, there are cases where the numbers are of little value.  Unstable income sources cannot be read by a mortgage calculator and are potential reason for a loan denial.

If your income is subject to fluctuations such as commission income, seasonal work, or variability of work hours, a lender will qualify the loan using very conservative estimate of likely earnings.  Self-employed borrowers receive particularly close scrutiny over the issue of sustained income and variability.

Insufficient down payment or cash reserves is often not able to be determined by the mortgage calculator.  For most purchases, the borrower is required to have sufficient down payment and reserves that are readily available and seasoned.  Insufficient cash in reserves needed to meet three mortgage payments is a standard measure.  If the reserves are not enough or the down payment and reserves are not able to be seen as the borrowers own funds for the past two months, the lender may conclude that the loan is above their risk limits and deny the loan request.  Down payment amounts and reserve requirements cannot appear suddenly as a borrower’s asset.  The funds must be seasoned which is a term to describe that the funds are the borrowers’ and have been for at least 2-3 months and came from a source that was also the borrowers, income or savings or as similar source.

Along with your mortgage payment of interest and principle, remember to add related insurance costs, taxes, homeowner association dues and any other costs when considering the payment options produced by a mortgage payment calculator.  Errors in these figures can cause on a mortgage loan to be denied when the borrower was expecting an approval based on monthly mortgage payment figures that were not accurate.

Mortgage qualification calculators and mortgage payment calculators are practical tools for all potential borrowers to assist in budget and lending decision making.  It is important to understand that the mortgage calculators cannot make the final decision on the loan approval.  Mortgage calculators provide are an excellent resource but will always have certain limitations for lending certitude, make sure the limitations are not errors brought about the poor quality of the information used.

This entry was posted on Saturday, December 13th, 2008 at 2:11 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.