The process used to determine whether a prospective borrower has sufficient assets and income, to repay a loan. Qualification may be referred to as “pre-qualification” as the information provided by the applicant is then subject to verification. Because qualification does not take into account the borrower’s credit history, it does not constitute approval. In some instances qualified borrowers may be denied a mortgage despite having demonstrated the capability to repay because of a poor credit history. This may serve to flag the applicant as potentially unwilling to pay.
The interest rate that is used to calculate the initial mortgage payment in the process of qualifying a borrower. The rate that is used in this calculation may or may not be the initial rate on the mortgage. For example, with ARMs, the borrower may be qualified at the fully indexed rate rather than the initial rate.
Lender stipulated requirements based on specified maximums used to determine if a borrower has the ability to qualify for a mortgage. These consist of two separate calculations: the ratio of housing expense to borrower income and total debt obligations as a percent of income ratio. While these may reflect the maximums as specified by Fannie Mae and Freddie Mac they may also vary with the loan-value ratio and other pertinent factors.
Standards, which are imposed by lenders as conditions for approving loans. These include maximums pertaining to ratios of housing expense and total expense to income, loan amounts, loan-to-value ratios, etc. They are not as comprehensive as underwriting requirements that also take the borrower’s credit record into account.