Determining who qualifies for a new mortgage is a difficult problem for both borrowers and lenders because, by itself, even a large income is not enough to guarantee a passable loan application. In the strange world of mortgage finance, it often happens that persons with lesser incomes are more likely to get loans than wealthier applicants.

Lenders make their loan decisions on the basis of risk and yield. Risk is represented by two factors: First, will the borrower be able to repay the loan? Second, will the value of the property be large enough to protect the lender in the event of foreclosure? Yield is the rate of interest--determined by market conditions at the time of application--plus such other fees and charges as the lender may be able to collect.

What do lenders look for when reviewing borrower applications? Here are several major areas:

* Income Ratio. A lender will want to know not only the amount of an applicant's income but that not more than a certain portion is goes to pay principal, interest, taxes and insurance (PITI).

Suppose that PITI totals $700 a month for a given property. If a lender allows an income ratio of up to 28 percent of an individual's gross monthly income for housing costs, it means that an annual income of $30,000 would be required to support a $700 payment. If PITI were limited to 25 percent of gross monthly income, an annual wage of $33,600 would be needed.

Income-ratio requirements may vary among lenders, so it pays to find the loan source with the best income-ratio standard.

* Secondary Income. The wages many people earn do not represent their entire income. Many individuals have secondary incomes from part-time jobs, dividends, trusts, etc. So long as such income is regular and continuing, lenders are likely to regard it as part of a person's income base.

* Debt. In addition to housing costs, most of us have other continuing obligations such as auto payments, alimony, credit card debt or child support. Lenders are likely to set a ceiling here, saying perhaps that no more than 36 percent of an individual's gross monthly income may be set aside for on-going expenses. To fall within the guidelines, it may be necessary to pay down credit card bills or finish off monthly auto payments.

* Employment. Steady employment is a major concern of all lenders. By "steady," lenders do not mean that you have to have held a single job for 40 years. Job changes are considered normal so long as they provide a pattern of income growth.

In addition to upward mobility, lenders also are concerned about job obsolescence and self-employment. In the first case, a meteoric rise to the top of the buggy whip industry, unlike a good career in computers, medicine or whatever, is not likely to enthrall many lenders. In the second case, self-employment raises questions about income regularity and size. Most lenders require tax returns for at least two years before they will consider an application from a self-employed individual.

* Net Worth. One index that lenders value is a strong net worth; that is, the value of assets over liabilities. By definition, borrowers who have accumulated extensive holdings of property, stock, cash and other resources while keeping down their debts have demonstrated a basic creditworthiness.

* Credit History. Having a sound income is of little benefit to a lender if a borrower's funds are not used to meet credit obligations. A lender will want a credit report showing that a borrower has repaid monthly debts on a timely and regular basis.

While the categories above describe general areas of interest to lenders, they do not discuss exceptions. The reality is that many borrowers fail to meet one or more criteria, yet get financing anyway. This happens because lending is more of an art then a science. For example, an individual may not earn enough to meet a lender's income-ratio requirement but that same person may be a physician completing a residency or a couple where one spouse is returning to the work force. On paper such individuals may not qualify but in reality they are likely to have rising incomes.

Getting a mortgage can be a relatively simple task, particularly for those who are prepared. To have the best chance, it pays to speak with various mortgage loan officers before applying for financing. Ask about income-ratio requirements as general loan information. When making application, be certain to have a handy list of account numbers for savings and checking accounts, money market funds, stock accounts, account numbers and balances for credit cards and installment debts such as auto loans, a list of assets and liabilities and, in many cases, tax returns and a cover letter describing your current financial position--where you've been and where you're going. NEXT: Risk, Loans and Property