Pre approvals

Will you qualify for a mortgage? 4 factors that influence the loan approval process

Will you qualify for a mortgage? If you’re on the market for a home, this is a question worth asking and answering. Whether your lender comes in the form of a bank, a credit union, or another financial institution, you’ll typically be asked to meet several basic qualifying criteria before your loan is approved. 

 

Here are 4 key factors that determine whether you’ll qualify for a mortgage.

 

Credit score

The first thing most lenders do is check your credit score. The higher it is, the better chance you have of getting your loan approved and the lower interest rate you’ll have. For a conventional mortgage, you usually need a score of 620+, and to benefit from a lower interest rate, you need a score above the mid 700s. If your credit score is low, there are things you can do to raise it, such as paying down your debt, making your payments on time, and halting new credit applications before your mortgage is approved. If you’re eligible for government-backed FHA or VA loans, the credit score requirements are far less strict.

 

DTI ratio

Your debt-to-income (DTI) ratio is the amount of debt you have compared to the amount of income you have. Lenders judge your ability to repay a loan based on how well you manage all debt. Hypothetically, if your rent, vehicle insurance, and existing loan payments add up to $1500 per month and you make $5000 per month, your DTI ratio would be $1500/$5000—or 30%. Typically, a DTI of 36% or less is considered good; 37-42% is manageable; and 43% or higher can negatively affect your mortgage application. If your debt is too great, you may need to consider buying a less expensive home, or else work on paying down your debt first.

 

Down payment

When purchasing a home, buyers are expected to put down a percentage of the total cost right away. Most lenders require a down payment of at least 5%, though some may allow one as low as 3%, depending on your track record as a borrower. Those eligible for FHA or VA loans are typically permitted to put down as little as 3.5%, or nothing at all, respectively. The balance lenders most favor with conventional mortgages, however, is 20% down, with a loan for the remaining 80%. Another thing worth keeping in mind is that if you put down less than 20%, you’ll have to pay private mortgage insurance (PMI).

 

Work history

One thing all lenders share in common is the obligatory proof of employment. Generally speaking, lenders want to see that you’ve worked for at least two years and earn a stable income. If you don’t have an employer, you’ll be asked to provide proof of income from another source, such as disability benefits, or, if you’re self-employed, by showing the last two years of tax returns, balance sheets, and a signed CPA letter stating you are still in business.

 

Bottom line: it never hurts to see how many boxes you check before applying for a home loan. After all, the more you get your house in order, the greater chance you have of landing the perfect home!

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