Qualifying for a Mortgage
by Shawn Carvin, Senior Mortgage Banker
There are many rewards and benefits of home ownership. But before the average person can realize these perks, he or she must qualify for a loan to purchase the property. Beginning the steps to qualifying for a mortgage might seem a bit overwhelming for some. However, if you educate yourself, becoming familiar with the process and requirements necessary for qualifying, the procedure will quickly become a little less exasperating and a little more exciting.
No matter what your current financial state is, the dream of home ownership is a goal that you can work towards and eventually fulfill. With the right information, guidance, and a mortgage professional that will work with you, qualifying for a mortgage may be easier than you think.
To ease your apprehension, take a look at the typical mortgage pre-approval requirements. This article can be used as a checklist to help you get organized and begin gathering the information and documentation necessary to work towards qualifying for a mortgage.
Your credit history and score
Your credit is one of the most critical determining factors of qualifying for any loan, especially a home loan. Lenders use your credit score to assess the likelihood of you repaying the money you have borrowed. Your credit history is what determines your credit score. Scores can range anywhere between a low of 350 to a high of 850. A good score is considered to be 740 or above, generally speaking. A score below 600 could be rated as poor. Keep in mind that qualifying for a mortgage is not reserved for only those with the best credit scores. There are loans and programs available to just about anyone who has the desire to own a home of their own. However, people with higher credit scores tend to get loans with lower interest rates.
Lenders also evaluate the amount of monthly debt payments you make in comparison to your monthly income. This is known as the debt-to-income ratio (DTI.) Acceptable debt-to-income ratios vary by lender and loan program, but in general, total monthly debt should not be more than about 40% of your gross income. For more information, read Debt-to-Income Ratios (DTI) Demystified.
Documentation is important when applying for a home loan. Your lender will need to see proof of employment and income, and bank account statements. Most likely, you will need to provide your W-2 or 1099 forms from the previous two years, your most recent paycheck stubs, tax returns from the past two years, bank statements for the previous three months, and documentation of any other assets such as mutual fund statements, property titles, and current statements for any investments.
The down payment
Planning for a down payment well in advance of buying a home can take much of the headache out of qualifying for a mortgage. There are some loan programs and creative approaches that can make it possible to purchase a home with no money down. But there are many advantages to saving for a down payment, or using funds which are gifted to you to make a down payment. Down payments can be as low as 3.5% for an FHA loan, which is a popular option for first time home buyers and other buyers who are unable or unwilling to make a large down payment.
Move ahead with optimism
There are quite a few variables when it comes to qualifying for a mortgage. The good news is that an experienced mortgage professional can help most anyone overcome challenges in meeting requirements for qualifying, so don’t count yourself out if your stats don’t look perfect at first glance.