When someone applies for a mortgage, lenders usually look for three qualifications which reduce the risk of issuing a mortgage loan. These include the borrower’s ability to repay debts in the past, his or her potential to repay them in the future, and the value of the collateral. Here are some more details on each of these mortgage qualifications and how lenders determine them:

A mortgage lender will look for any bankruptcies or foreclosures in the borrower’s past as part of its estimation of how well a borrower has previously repaid debts. It will also look at the borrower’s history of paying bills on time or late, based upon his or her credit record. The lender is likely to reject the application or charge a higher interest rate if the borrower has not paid or has been very late in repaying many debts. Only the repayment of debts to businesses which provide information to the credit reporting agencies will have an effect on this.

The lender will also look at the potential borrower’s ability to make mortgage payments on time in the future (if the loan is approved). To determine this, it will take into account the level of income (usually from tax returns), along with the apparent stability of that income. The down payment amount also has an impact on this qualification, as a larger down payment decreases the size of monthly payments and reduces the amount of money the lender has to risk losing.

Additionally, the mortgage lender will look for the value and security of the collateral. The collateral consists of the home or business and the land it is located on. The lender wants to know that it will be able to sell the collateral for a sufficient amount of money if it has to foreclose upon it, and will use an appraisal to determine how much it is worth. Its value must also be secure; if the home or business is located in an area where a natural disaster is likely to occur, the mortgage lender will look to be assured that the owner can and will insure it.

Because of the current subprime mortgage crisis, lenders have become more wary of issuing loans to borrowers who do not thoroughly meet all three of these qualifications. However, it is thought that recent moves by the Federal Reserve may encourage somewhat less restrictive lending.