Most people know about the many benefits and rewards of becoming a homeowner. The challenging part is knowing what it takes to qualify for a mortgage loan.
There is a lot of different information that is taken into consideration to determine whether you’ll qualify for a mortgage. Ultimately, it comes down to four things: credit, down payment, income, and assets.
Your credit is one of the most important things that will be considered when determining if you qualify for a home loan. Your credit history is how a lender will judge the likelihood that you’ll pay them back the money they lend you. To do this, a lender will look at the length of your credit history, how reliably you’ve paid on your loan accounts, and if you’re maxed out on credit cards or loans. These are also the factors that determine your credit score. Your credit score will be used to qualify you for a mortgage and will often determine the interest rate you will be offered.
Credit scores used for a mortgage range between 350 (low) and 850 (high). A healthy credit score is generally considered to be above 740 and a poor credit score is anything below 600. The higher your credit score, the better the interest rate you’ll likely be offered.
The minimum required down payment when buying a primary home is typically 3.5 percent of the sales price, which will allow you to get an FHA loan – a great option for first-time home buyers or anyone who can’t come up with a huge down payment. FHA loans also don’t penalize you with a higher interest rate if you have less-than-perfect credit. Another option is a conventional mortgage. Conventional loans typically require 5 percent to 10 percent down.
Income vs. Debts
Another factor looked at by lenders is your debt-to-income ratio (DTI). This is simply your fixed expenses with the new mortgage compared to your gross monthly income (income before taxes are taken out). Lenders typically want to see someone spending less than 50 percent of their gross monthly income on these fixed expenses, which include your mortgage payment, property taxes, association dues, home owners insurance, car loans, student loans, credit cards and any other fixed payments that would show up on your credit report. Variable expenses like utilities, phone, and cable are not included in your DTI.
Lenders also verify that the funds you will use for your down payment are in a liquid account, like a checking account or savings account. If you like to keep your cash in a pile under your mattress, you may have trouble getting approved for a loan and will need to deposit that cash into a bank account. Lenders need to see where all the funds being used in the transaction are coming from and there is no way to document loose cash.
There are many different factors that go into qualifying for a home loan today. Hopefully, this breakdown will help you better understand what is considered when qualifying for a mortgage loan. If you have any questions, feel free to contact us.