Today’s mortgage market can seem very intimidating to any home buyer. Not only are there are a lot of figures and terms that get thrown around, there is also a lot of incorrect information that gets disseminated about what is required to qualify for a home loan.
When it comes to the various loan options, most lenders look at the same things. The two most common loans are Conventional loans (through Fannie Mae and Freddie Mac) and Government loans (through the FHA, VA and USDA). Regardless of the loan type, there are five main things that a lender will look at in order to determine if you qualify: credit score, credit history, liabilities, income, and down payment amount.
When it comes to qualifying for a mortgage, your credit score plays a major part. Depending on which type of loan you are applying for, lenders will be evaluating your credit score against different requirements. For example, a Conventional loan requires a minimum score of 620. FHA loans have more relaxed requirements and typically allow down to a 580. (Note: There are instances when less than a 580 is acceptable) If you’re unsure what your current credit score is, there are plenty of free tools that can help you.
In addition to your credit score, lenders will also look at your credit history. Your history will be obtained from a credit report in which the lender will use to examine if you have any collections or charge-offs, judgments, bankruptcies or foreclosures. The guidelines that lenders use when evaluating significant derogatory credit vary widely, so it is best to always have a lender analyze your credit rather than assume you do not qualify.
Lenders will also be analyzing your monthly liabilities such as car loans, student loans, credit cards or other similar debts that are usually reported on your credit report. Other liabilities they will examine are private loans and court-ordered obligations, such as child support. Additionally, a lender will determine the payment amount for the home you are looking to purchase. The payment will include principal, interest, taxes and insurance. These liabilities will be compared to your income in order to calculate the debt-to-income ratio.
The other factor used to calculate the debt-to-income ratio is your income. Your income can include employment income, self-employment income, investment income, retirement income and many other sources. Lenders will use your gross income to qualify you. This means your income before any deductions like taxes or benefits. There are a number of different ways to calculate and document income, so it is best to have the lender review your income before assuming that yours will not qualify.
The size of your down payment is critical when determining what you qualify for. Loan programs have different down payment requirements. In fact, the minimum down payment for loan some loan programs are as low as 0%. Other factors that can dictate the amount that you must put down include credit score, credit history and debt-to-income ratio which all play a role in determining your minimum down payment requirement.
If you have questions regarding the mortgage qualification process or requirements and would like to speak with a loan officer, please contact us today.
Are you struggling to come up with large down payment? We have down payment options as low as 0%.