HE-2S2
FINDING SHELTER:
A HOME OWNERSHIP PROGRAM
COOPERATIVE EXTENSION SERVICE • PURDUE UNIVERSITY • WEST LAFAYETTE, INDIANA
QUALIFYING FOR A HOME LOAN
by Susan Merkley, Extension Housing Specialist, Consumer Sciences and Retailing
Purchasing a home represents the largest single investment most consumers make in their lifetime. Because the initial cost is high, few prospective buyers can afford to pay the full purchase price. As a result, funds to pay the seller must be borrowed from a lender. The lender, in turn, is then repaid over a period of time.

This publication is designed to help consumers understand the criteria involved in qualifying for loans from a variety of lending sources. Various institutions are involved in making home mortgage loans. They include: savings and loan associations, commercial banks, mutual savings banks and mortgage banking companies. In some cases, even sellers are interested in lending money to borrowers. Each source is concerned with evaluating a home loan by assessing its default risk—the probability that the loan will not be repaid.

This risk analysis is based on: (a) determining the quality of the borrower’s loan application, and (b) evaluating characteristics of the property. Both of these risk analysis factors are discussed in this publication, along with guidelines to help potential borrowers determine how much they can safely afford to spend on housing. For help in determining the potential monthly and lifetime costs of borrowing money for a home, consumers should consult “Financing a Home,” HE-251, available at your local County Extension Office.

Borrower Qualifications
One of the lender’s main concerns in evaluating a potential loan is the borrower’s ability to repay the loan. When the lender is approached, a loan application is completed. This application becomes the basis for determining the borrower’s credit worthiness and ability to make payments on the loan both now and in the future.

Evaluation of the Borrower
Most lenders will request the following information in the loan application:
•	the size and makeup of the household
•	present and potential income, including salary and other sources
•	personal assets, such as cars, savings, stocks, bonds, or life insurance
•	current and past employment of household members
•	debts of the household
•	a credit history
•	permission to obtain a credit report.

Borrower Income
Some lenders use common guidelines to determine how much income should be in relation to home loan payments. These guidelines are based on studies indicating what the average household in the United States spends on housing. The guidelines are applied to determine whether the household can comfortably make the monthly mortgage payments and have enough extra income to meet monthly living expenses.

Some guidelines commonly used include:
•	Total monthly mortgage payments should not exceed 25 to 28% of the borrower’s gross monthly income. The total monthly mortgage payment includes an interest and principal payment to reduce the loan amount plus a monthly allowance for property taxes and hazard insurance. (Note: principal, interest, taxes and insurance are referred to as PITI.)
•	PITI payments plus monthly installment payments should not exceed 35 to 40% of the borrower’s gross monthly income. Installment payments include such items as car or charge card debts. They should be considered if they will continue for 10 to 12 months.
•	Total monthly housing costs should not exceed 35% of gross monthly income. Total monthly housing costs include PITI payments plus estimates of utilities, repairs and maintenance.
•	A credit report or investigation should indicate that the borrower’s past credit repayment history is rated good.
•	Income and job stability are such that the lender can expect that PITI and installment debts will be paid over the total life of all loans.
•	The borrower’s existing assets are evaluated. The loan application rating could be improved if the borrower has demonstrated the ability to save by putting money aside in savings accounts or investments such as life insurance or other property.