Each loan requires an analysis of 4 factors: assets, credit, income, and down payment. I decided to create an acronym for clients to remember; i.e. the ACID® test. If you pass the ACID® test, you should be able to qualify for a loan.
“A” is for assets, i.e. your checking, savings, brokerage, and retirement account balances. Underwriters examine the authenticity of these statements, and that you have access to these funds.
“C” is for credit. This refers to your credit score and your credit history. A solid credit history and a good score will help your chances for approval.
“I” is for income. Are you a salaried or hourly employee? Underwriters will examine your paystubs and W-2s. If you are commissioned your tax return will need to be seen; including an examination of any unreimbursed expenses. If you are self-employed, they are going to want to see at least the last year’s tax return. The underwriters will compare your monthly income against your monthly debt to determine a debt-to-income ratio. General lending principles prefer a debt-to-income ratio of 43% or less, although we have seen approvals up to 50%.
“D” is for down payment. The greater the down payment, the less you are asking to borrow, the less your payment will be, and the lower your debt-to-income ratio. Similarly, for a refinance, the more equity in the home, the less you need to borrow, the lower your ratio.
You need to be strong in each factor in order to be qualified. In other words, if you have great credit, that does not make up for little income.
So, if you are looking to be qualified for a loan, keep this simple test, the ACID® test, in mind.