Qualifying for and obtaining a mortgage is essential when buying real estate. Whether you're a first-time buyer or you're just looking to refinance or pull equity out of your home, understanding what is needed to qualify for a mortgage loan is the first step. Mortgage lenders and brokers take into consideration multiple factors to determine your eligibility, and understanding these as a consumer can majorly boost your chances of loan approval. We will take a look at the important categories that impact your qualification for a mortgage loan in today's market.
Keep in mind that it's always best to check in with a highly-experienced mortgage loan professional to inquire about industry guidelines and changes. We recommend Ross Varahrami, who has ranked in the top 1% on experience.com. Now lets take a look at how to qualify for a mortgage loan to buy a home.
1. Credit Score (FICO): The Base of Mortgage Approval
Your credit (FICO) score plays an essential role in the mortgage qualification process. Mortgage lenders and brokers use this metric to assess your creditworthiness, and it plays a key role in determining the risk of lending to you. Typically, elevated credit scores signal a reduced risk threshold, thereby simplifying the qualification process for favorable loan terms. When the lender checks and sees a higher FICO score (let's say 700 or higher), it is more likely to result in a competitive interest rate and could potentially cost you less in the process. Not to mention, it usually qualifies you for more loan options.
To boost your credit score:
Pay your bills on-time and demonstrate a solid repayment history.
Limit any outstanding debts.
Try to stay below 30% of your credit card limits.
Correct any inaccuracies on your credit report.
Read this article to learn more about boosting your FICO.
2. Debt-to-Income Ratio: Another Key Factor
Mortgage companies will take a look at your debt-to-Income (DTI) ratio to assure them that you can manage making mortgage payments in addition to your other debts. This ratio will compare your monthly debt (minimum payments) to your gross monthly income. If you have a non-traditional way of being paid (e.g.- tips, bonuses, commissions, overtime) it may be unique and they will need to calculate your income manually. A reduced debt-to-Income (DTI) ratio, preferably under 43%, indicates to lenders that your income is ample to comfortably meet your debt obligations. This will in turn, increase your odds of approval.
To improve your DTI ratio:
Pay down and eliminate any existing debts where possible.
Try your best to avoid taking on any new debt.
If there is any way to increase your income, it would be a plus.
Read this article to learn more about debt-to-income ratios.
3. Income and Employment Consistency: Showing That You're Reliable
Mortgage lenders seek confidence in your ability to sustain a stable income for meeting mortgage obligations. Qualifying for a mortgage loan hinges significantly on your employment track record and income consistency. Generally, lenders favor applicants with a minimum of two years of continuous employment in the same field or industry.
To demonstrate stability:
Keep up steady employment.
Limit the amount of job changes.
Stay in the same line of work for > 2 years.
Show consistent or increasing income.
4. Down Payment: Your Investment aka Skin in the Game
Although certain loan programs provide opportunities for low down payments, possessing a significant upfront payment can increase your eligibility for a better fitting mortgage. A substantial down payment signifies financial strength and diminishes the amount of money that you must borrow, showing the lender that you are a less risky borrower.
To save for a down payment:
Set a goal to save money and nail it!
Eliminate any expenses that you don't need - especially recurring.
Check for any down payment assistance programs that you may qualify for.
5. Property Appraisal and Loan-to-Value Ratio: Protecting Lenders' Interests
Mortgage lenders assess the value of the subject property through an appraisal process. The Loan-to-Value (LTV) ratio gauges the total loan amount against the property's appraised value. A lower LTV ratio, typically under 80%, is most favorable as it signifies reduced risk for the lender.
To maintain a lower LTV ratio:
Choose a solid property with good value and resale potential.
Continue saving for a bigger down payment.
Read this article to learn about home improvements that can increase value.
6. Mortgage Pre-Approval: Empowering Your Home Search
Getting pre-qualified or pre-approved for a mortgage is a necessary step that not only benefits you in knowing if you're good for a loan, but it also proves that to the buyer's and sellers agent including the sellers of the home. During the pre-approval process, mortgage lenders will review your credit and financials to determine your home-buying budget.
To secure pre-approval:
Get together all of your income and financial documents.
Be sure that you credit is unlocked so that they can do a credit check.
Read this article to learn more about Pre-approval.
Qualifying for a mortgage loan entails a pretty significant evaluation of your credit, assets, income, and debts. By proactively managing your credit score, debt-to-income ratio, employment stability, down payment, property choice, and seeking pre-approval, you will be prepared for a smooth mortgage process. Keep in mind that each lender may have slightly varied criteria, making it a good idea to check-in on multiple options and identify terms that align with your financial goals. If you read, ask questions, do your due diligence and are prepared, you to can be in the best spot ready to buy a home!