If you’re wondering how to qualify for amortgage, you’re not alone. Do you just show up at a bank with acheckbook, and hope for a good mortgage rate and a smile? Hardly! Mortgages aren’t handed outto just anyone—they require a lengthy screening process. If you’re a first-time home buyer, figuring out what you need to get a mortgage can be tricky. But we’re here to help.
How to qualify for a mortgage
Just soyou know everythingyou needto bring to the table when you need to qualify for a mortgage, here’s a guide on howtoplease the lending gods so they deem you worthy of receiving a huge pile of cash and a great mortgage rate—and what to do if you haven’t covered these bases quite yet so you’ll pass mustersoon enough.
Let’s jump in! First off, you need to gather a mess of paperwork from bank statements to pay stubs to tax returns and W-2s. But in addition to paperwork, you need a few other items to get a mortgage loan. Here are the essentials:
A good credit score
When you apply for a mortgage, lenders will check yourcredit scoreto assess whether you’re a low- or high-risk borrower. The higher your score, the better you look on paper, and the better your odds of landinga great loan.
While a perfect score is 850, research suggests that only about 0.5% of consumers hit that coveted mark. As a result, scores of 760 and higher areconsidered to be in the best range from a mortgage lender’s perspective. It means you’d qualify for the best (that is, lowest)interest rates, saysRichard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”
Agood credit scoreis 700 to 759; a fair score is 650 to 699. If you have multiple blemishes on your credit history (e.g., late credit card payments, unpaid medical bills), your score could fallbelow 650. If that’s the case, you’ll likely get turned down for a conventional home loan—and will need to mend your credit in order to get approved (unless you qualify for aFederal Housing Administration loan, which requires a 580 minimum credit score).
Your first step, therefore, should be to check your credit report, saysBeverly Harzog, consumer credit expert and author of “The Debt Escape Plan.”
You’re entitled to afree copyof your full report at AnnualCreditReport.com.The report does not include your score—for that, you’ll have to pay a small fee—but just perusing your report will give you a ballpark idea of how you’re doing by laying outany problemssuch as late or missing payments.Some credit card companies, including Discover and Capital One, also offer customers free accessto their scores and reports.
You should also check to make sure you’re actually the person responsible for any black marks that appear on your report. It’s more common than you might think—one study by the Federal Trade Commission revealed that 1 in 4 Americans spotted errors on their reports.
If you havepoor credit, it may take you several months to raiseyour credit score into a range where you can qualify for a mortgage. (Here’s advice onhow to improve your credit score.)
Substantial—andstable—income
How much income you need to get a mortgage home loan boils down to your debt-to-income ratio; this figure compares your earnings on your tax returns with your outstandingdebts. To qualify for a home loan, your job’s income must be high enough to offset your debts, including your possible mortgage payments.
To calculate your DTI ratio,figure outhow much you’re paying in debt per month—by tallying up things like car payments, studentloans, and credit card bills—anddivide that amount by your monthly income on your pay stubs.
Let’s say, for example, that every month you’re paying $250 indebts and pulling in$5,000. Divide $250 by $5,000, and you havea DTIratio of 0.05, or 5%. That’s well belowthe recommended rule of 36%,saysDavid Feldberg, broker and owner of Coastal Real Estate Group, in Newport Beach, CA. Keep in mind, though, you don’t own a home yet, which willpush up your DTI.
Once you know your income and debt,you can use an onlinehome affordability calculatorto see how much you can shell out for a new house, while still remaining below that 36% DTI ratio threshold.
Let’s take the aforementioned example where youmake $5,000 a month and pay $250 in debts. Now let’s assume you havearound$30,000 for a down payment and can get a 30-year mortgage at a fixed interest rate of 5%. Enterthese numbers into ahome affordability calculator, andthis will put you in the ballpark of affording a home worth$243,100.
In addition, lenders like to see at least two years of consistent income history, saysTodd Sheinin, mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD.
This creates a roadblock for many workers who are just starting their careers or are self-employed. If you’re in the latter situation and have variable income, you may need additional assets such as a higher down payment (more on that next) in order to qualify for a mortgage.
A sufficient down payment
Most mortgage lenders like to see that you have enough in the bank tomake a20% down payment—which amounts to $50,000on a $250,000 home. (And they will be looking at your bank statements.) So if you don’t have that much saved up, it’s time to start pinching some pennies so you can start making those mortgage payments! But there are other options as well.
FHA-backed loansletborrowers make down payments as low as 3.5%. If you’ve served in the military, theDepartment of Veterans Affairsloans require no down paymentat all.Only eligible for a conventional loan? Expect to need at least a 10% down payment, says Sheinin. However, if you put anything less than 20% down on a conventional loan, you’ll need to payprivate mortgage insurance—a monthly premium that can range from 0.3% to 1.5% of the total loan amount.
