As you progress through the home buying process, you will start to hear and/or read about “qualifying for a mortgage.” This can be a nerve-wracking time when you’re looking to buy a home, but the mortgage experts at VIP Mortgage are here to help. In this handy guide, we’ll go over a few of the factors that lenders examine when qualifying someone for a mortgage. We’ll also go over the steps prospective homebuyers can take to improve their prospects of qualifying for a home loan.
Qualifying for a Mortgage
When qualifying someone for a mortgage, lenders typically look at 4-5 key factors. These include:
Income: Typically, the first thing a lender will look at is your household income. Income encompasses not only your salary, but any other consistent and reliable sources like military benefits, commissions/overtime, alimony or child support payments, investment income, and more. Lenders want to be sure that your income has and will continue to be steady so that you will be able to make your mortgage and other payments each month.
Credit Score: Your credit score tells your lender how reliable you are as a borrower. Multiple specifics go into calculating your credit score, but the main factors that go into your score are paying your bills, how much debt you carry, and your spending (this one varies). If you make your regular payments on time (bills, credit card, etc.), have a low amount of debt, and keep good tabs on your spending, your credit score is usually high. Failing to make payments on time and increasing your debt (including spending beyond your means), will lower your credit score. Keeping up with these habits will result in a lower score. The minimum credit score needed for a mortgage varies depending on the loan type, but 620 is a common benchmark for most home loans.
Assets: For lenders, your assets act as a backup plan should a financial emergency arise. They will look at the monetary assets you own that include checkings/savings accounts, retirement accounts (ROTH IRA, 401K, etc.), stocks, and other holdings. In a home loan, physical assets are not used as collateral.
The type of property you are buying: Lenders will also look at the type of property you are buying when qualifying you for a home loan. Whether you are buying a condo vs. a house, 1 or two stories, etc. is not factored in. Lenders look at whether the property will be a primary residence vs. an investment or secondary property. It is “easier” to qualify for a loan on a primary residence, as lenders understand it will likely be your top financial responsibility and you will do whatever you can to continue to make payments on it. Investment and secondary residences are riskier for lenders, as the buyer may not prioritize it as much. In those purchases, the lender has more to lose than the buyer.
Debt: Your debt, or more accurately, your debt-to-income ratio (DTI), is the final factor a lender will consider. To ensure you will be able to meet your mortgage payments, lenders will calculate your DTI percentage to see how much of your monthly income goes towards bills and other regular payments. A DTI of 50% or less is preferred for most types of home loans.
How to Improve Your Qualifications
To ensure you can receive the mortgage you want to buy your dream home, you will want to have a well-rounded application. While you do not need to have a “perfect” application, having each factor in your portfolio at its best will give you the best chance of being approved. A few tips to improve your mortgage application include:
Improve your credit: Besides applying for a mortgage, your credit score is used as a qualification score for my types of loans. A better credit score will not only allow you to qualify for other types of loans but will also give you access to better interest rates. A few ways to increase your credit score include not using more than 30% of your available credit each month, pay down your debt, and making all your payments on schedule.
Reducing your debt: Decreasing the amount of debt you have improves your DTI and your chances of qualifying for a mortgage. One way is to consolidate any extra income into debt reduction.