How Can I Qualify for a Mortgage?
Summary: A mortgage is a type of loan used to purchase real estate properties. There are specific qualifications a borrower needs to meet before they can get a mortgage to buy a house, but qualifying for a mortgage often depends on the loan type a borrower is interested in.
The housing loan is an agreement between the buyer and the mortgage lender to pay the loan amount over a set number of years, along with interest.
There are specific qualifications a borrower needs to meet before they can get a mortgage to buy a house. A few general qualifications mortgage lenders evaluate are borrower’s income, debt/debt-to-income ratio (DTI), and credit score.
Mortgage lenders inquire about a borrower’s income to determine if the borrower has enough money to make payments throughout the life of the loan. Mortgage lenders will also inquire about assets. Assets can be checking accounts, savings accounts, stock, or retirement accounts. If the borrower suddenly loses their job, for example, mortgage lenders need to know they can continue making payments towards the housing loan. Mortgage lenders will request documentation of all assets.
Debt-to-income ratio (DTI) calculates the percentage of a borrower’s monthly income used to pay their monthly debt. DTI helps mortgage lenders have a complete understanding of a borrower’s finances by looking at all the debt they may owe.
A credit score is a three-digit number that predicts the likelihood of a borrower making payments on time. Credit scores typically range between 350 to 850. Higher credit scores indicate a borrower being responsible for their debt and consistent in their repayment. Lower credit scores can indicate high debt and a potential spending problem. Higher credit scores receive favorable loan terms and interest rates.
How to Qualify for a Mortgage?
Qualifying for a mortgage often depends on the loan type a borrower is interested in. Certain requirements, such as DTI, credit score, and savings for closings are universal, but different loans have additional requirements.
Conventional loans can be used to purchase a first home, a second home, or an investment property. A minimum credit score of 620 or higher and a DTI of 43% or lower are recommended, but different mortgage lenders have different requirements.
Jumbo loans are used to purchase homes that go above the guidelines of conforming loan limits. Typically, borrowers must have higher credit scores, lower DTI, the ability to meet down payment requirements, and they must have a good amount in assets. Jumbo loans also require borrowers to have two home appraisals done before they can qualify for a mortgage.
ARM (Adjustable-Rate Mortgage)
Adjustable-rate mortgages are loans with a set interest rate for a fixed period. Once the fixed period is over, the interest rate will regularly reset to the current rates. Borrowers can set the starter period (when the interest rate is fixed) to three, five, seven, or ten years. Borrowers will need a credit score of at least 620 with a DTI ratio of 50% or lower. However, contact your mortgage lender to learn about their specific qualifications.
A type of government-backed loan that helps to expand homeownership. Borrowers need a minimum credit score of 620 and must put at least a 3.5% down payment towards their home.
VA loans are another form of government-backed loans for both active and veteran military members and qualifying spouses. VA applicants are offered low interest rates, qualification opportunities for a zero-down payment, and do not have to add mortgage insurance.
USDA Home Loan
Backed by the United States Department of Agriculture. The home loan helps moderate to low-income borrowers purchase homes in rural areas. To receive a USDA home loan, the home must be in a USDA-eligible area and the borrower must meet certain income requirements. USDA home loan borrowers may also be eligible to finance 100% of their loan.
Below are some tips to increase your chances of qualifying for a mortgage.
- Improve your credit score
- Your credit score significantly impacts your chances of receiving a home loan.
- If your credit score is low – make payments on time, pay off debt, keep paid-off credit cards open, and monitor your credit utilization ratio.
- Lower your DTI
- Lowering your DTI can open funds that can be used towards a larger down payment or closing costs.
- Save for a down payment
- A generous down payment does have benefits such as more home equity and no mortgage insurance– depending on the loan type.
- Consider a cosigner
- If your credit score and DTI ratios are not within the ranges set by the mortgage lender, having a cosigner may help you get approved for the loan.
- A cosigner is an individual that agrees to take financial responsibility for the mortgage if the original applicant fails to make payments.
Once you have taken care of your finances, get a pre-approval. Mortgage lenders evaluate a borrower’s income, assets, credit score, and DTI before issuing the pre-approval letter. The verification process also helps in determining the loan amount, terms, and other information for the pre-approval that can be utilized when looking for homes.
For more information, chat with us at callhallfirst.com or give us a call at 866-Call-Hall.