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, commonly referred to as "ICE", that will determine if a person will be qualified to apply for a home loan. These factors will also determine the type of mortgage that can be offered to a person planning to get a home mortgage.

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

To qualify for a home mortgage, you must have a debt-to-income ratio rating of at least 28/36. Here, 28 indicates the front-end-ratio, while the value 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 monthly. 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 determine what type of customer a person is. If a person has a bad credit score, this means that the person often misses regular payments and is then considered as a high risk investment. Banks and other lending institutions rely heavily on a person's credit score in determining a potential applicant for a home loan or any type of loan.

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

EQUITY: Equity refers to the appraised value of your home minus the amount you still have to pay 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 above three factors determine whether a person is eligible to get a home mortgage. Depending on a person's ICE mix, he or she may be offered good or bad home mortgage options. For example, if a person has a relatively low income with a 10% equity interest in his home however a high credit score he has; he 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 mortgage, visit his site today.