The lender’s qualifying criteria determine how big a loan you can get. The lender will need to know if you can afford to make loan payments regularly based on your income and other financial obligations. There are several standard ratios used in loan qualifying depending on what type of loan you are seeking. These ratios compare required housing costs and other long-term obligations to your income in an effort to determine affordability.

The best way to describe loan qualifying is with an example: Suppose the Browns apply for a mortgage loan of $150,000. The lenders then ask them to state their income. Mr. Brown makes $45,000 a year, and Mrs. Brown makes $30,000, bringing their total monthly income to $6,250. The loan is for 90% of value with a fixed rate of 8% (30 years). Monthly payments are $1,101 for principal and interest, plus $300 for escrow. More->