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Knowing the ICE of Home Mortgages
When you want to purchase a home for the first time or you are in the process of refinancing an already existing one, you need to know the basics of how a home loan works. The first thing that you need to know is the major factors that would determine whether you will be eligible to get a home mortgage or not.

There are basically three major factors that determine if a person will be qualified to apply for a home loan. These big three, commonly referred to as ICE, will also determine the type of mortgage program that can be offered to a person planning to obtain a home mortgage.

INCOME: The I in ICE refers to income. A persons gross monthly income and total housing expenditure are used to calculate the Debt to Income ratio. This value gives the ability of a person to pay his or her debts. The DTI is actually the percentage of a persons gross monthly income that can be used to pay his/her home mortgage. There are two main types of DTIs used to determine whether a person can be given a home loan. The first type is called the Front-end ratio which indicates the amount or percentage of the persons income that will go towards the payment of the housing costs. The second type, called the back-end ratio, indicates the percentage of the income that will go to paying all other recurring debts that the person has.

For you to qualify for a home mortgage, you must have a debt-to-income ratio rating of at least 28/36. Here, the value 28 indicates the front-end-ratio, whereas 36 is the back-end ratio. It means at least 28% of your income will be allocated for paying housing expenses while 36% is for paying all housing expenses as well as all other recurring expenses that you need to pay per month. The amount of home loan offered to you will be partially based on your DTI.

You can easily determine the amount of mortgage that you will be qualified to have by comparing your DTI value with the amortization payments computed through the use of a mortgage calculator.

CREDIT: Credit scores are used to evaluate what type of customer you are. Having a bad credit score means if often missing regular payments. This is considered as a high risk investment. Banks and other lending institutions heavily rely on credit score to know whether a person is a potent applicant for a home loan or any type of loan.

There are three major credit reporting agencies namely: Experian, Trans Union, and Equifax, which compute the credit score of a person, based on his/her financial activities. Banks make use of these agencies to determine factors such as a persons credit mix, credit balances and credit limits. Credit scores may range from 300 to 850. A person having a low credit rating may be denied a mortgage loan. However, banks may still give him a mortgage but one with high interest rates. On the other hand, a person with high credit score may qualify for a home mortgage loan with better interest rates.

EQUITY: Equity refers to the The difference value between the appraised value of your home and what you still owe on an existing mortgage. For example, if your home has an appraised value of $100,000.00 and you still owe the bank $50,000.00 in a previous mortgage, then your home has an equity value of $50,000.00. This equity or home value is another important factor that will let the banks or lending institutions know if a person will qualify for a home loan.

The three above factors determine a persons qualifications for obtaining a home mortgage. Depending on a persons ICE mix, he or she may be offered good or bad home mortgage options. For example, if a person has a relative low income with a ten percent equity interest in his home however a high credit score has; this person will qualify for multiple home mortgage options at very competitive interest rates.

Article by John Hoots of Chicago, who is a specialist in real estate investments. For more information on Chicago home loan, visit his site today.


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