In practice, qualifying for a home loan is rather easy and simple regardless of ability. The maximum monthly payment approved determines the amount you may borrow, and is a far more important issue for most borrowers. Additionally, all lenders must conform with a wide assortment of federal laws and policies that apply to all home loans (both conforming and non-conforming). The result is that most people who want a home, and who demonstrate their ability to make payments, receive approval at some level.

The most important factors for approval are: Home value: which is the fair market value of your home as determined by an appraisal. Lenders choose their own appraisers. Appraisals seldom peg value to the highest possible price for a home, and likewise avoid liquidation value. Most ability home loan appraisals used by lenders represent an accurate estimate of a sale price obtained by a motivated seller.

Loan to home value ratio: Once you know the value of your home (or a good estimation), all lenders consider the ratio of a loan amount to collateral value. Most lenders routinely approve loans up to 100% of the value of your home.

Repayment ability: Cash flow is the most important indication of your ability. Home loans at low interest rates produce low payments. Consequently, when interest drops, loan amounts increase dramatically.

Credit rating: The three primary rating companies are widely accepted, but not always. A few lenders prefer to rely on smaller or local agencies. In general, each agency has a point system that places great weight upon a steady repayment history. Habitual late payments and excessive credit card balances are the two most common factors that reduce scores.

Legal Requirements for conforming home loans: For federal government percentage guidelines, see the ability home loan formula for applicable agencies. These percentage guidelines are not mandatory for all loans. But in practical application, because all mortgage companies prefer loans that conform to these requirements (to resell your loan into secondary markets), many lenders request slightly higher interest for variations.