If you’re curious about what qualifying for a mortgage looks like, you’re not alone. Do you just show up at a bank with a checkbook, and hope for the best? Not quite! Mortgages aren’t handed out to just anyone—they require a lengthy screening process. If you’re buying your first home figuring out what you need to qualify for a mortgage can be tricky. But Corken + Company is here to help!
How to qualify for a mortgage:
It’s important to know everything you need to bring to the table when you need to qualify for a mortgage. Here’s a guide on how to please the lending gods and what to do if you haven’t covered these bases quite yet.
A good credit score:
When you apply for a mortgage, lenders will check your credit score. They will 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 landing a great loan.
While a perfect score is 850, research suggests that only about 0.5% of consumers hit that mark. As a result, scores of 760 and higher are considered to be in the best range. It means you’d qualify for the best (that is, lowest) interest rates, says Richard Redmond, a mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”
A good credit score is 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 fall below 650. If that’s the case, you’ll likely get turned down for a conventional home loan—and will need to mend your credit to get approved (unless you qualify for a Federal Housing Administration loan, which requires a 580 minimum credit score).
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 outstanding debts. To qualify for a home loan, your job’s income must be high enough to offset your debts. This includes your possible mortgage payments.
To calculate your DTI ratio, figure out how much you’re paying in debt per month. You do this by tallying up things like car payments, student loans, and credit card bills—and divide that amount by your monthly income on your pay stubs.
Let’s say, for example, that every month you’re paying $250 in debts and pulling in $5,000. Divide $250 by $5,000, and you have a DTI ratio of 0.05 or 5%. That’s well below the recommended rule of 36%, says David Feldberg, broker, and owner of Coastal Real Estate Group, in Newport Beach, CA. Keep in mind, though, that you don’t own a home yet, which will push up your DTI.
Once you know your income and debt, you can use an online home affordability calculator to see how much you can get for a new house, while remaining below that 36% DTI ratio threshold.
Let’s take the aforementioned example where you make $5,000 a month and pay $250 in debts. Now let’s assume you have around $30,000 for a down payment and can get a 30-year mortgage at a fixed interest rate of 5%. Enter these numbers into a home affordability calculator, and this 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, says Todd 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. These can be things such as a higher down payment (more on that next) to qualify for a mortgage.
A sufficient down payment:
Most mortgage lenders like to see that you have enough in the bank to make a 20% down payment—which amounts to $50,000 on 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 loans let borrowers make down payments as low as 3.5%. If you’ve served in the military, the Department of Veterans Affairs loans require no down payment at 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 pay private mortgage insurance—a monthly premium that can range from 0.3% to 1.5% of the total loan amount.
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