Three-Legged Stool

When you apply for a home mortgage lenders evaluate three main parts of your application. This review can be compared to a three-legged stool. As with a three-legged stool, the stronger each leg is the more solid and reliable it will be. The three components are Income, Assets and Credit.

The first component – income – measures your ability to repay debts including the proposed mortgage payment. Income that is reliable and likely to continue will be considered in the underwriter’s evaluation if the borrower will be able to make timely payments. Examples of acceptable income sources are salaried/hourly/self-employment earnings, Social Security or retirement income, child support or alimony payments, etc.

The second leg – assets – addresses the client’s ability to provide a down payment (if needed) and the additional assets/reserves the borrower will have available after closing. The more assets a client has the stronger the leg will be. A strong asset position is beneficial to a loan application because in case of job loss or other emergency the client could draw on these funds to pay the mortgage instead of paying it from an income source. Typical asset classes are checking/savings accounts, retirement accounts, stock and bonds, or funds obtained an acceptable third party (usually a family member or down payment assistance program).

The third and final leg – credit – is a credit report reflecting information from three major credit bureaus. This report shows information about timely payments and how much debt the client has. This leg is a critical part of evaluating a mortgage application as it demonstrates a borrower’s ability to handle credit over the years.

As with a stool and with most mortgage programs, a loan to be considered solid each of the three legs plays a part in supporting it. If one of the components is absent or weak then the stability is questionable. Working with an experienced mortgage banker who understands the nuances of each of the legs of a loan puts you in the best position to finance your dream home. Have questions? We’re here to help.