If you are planning to buy a home, chances are you’re not going to pay cash for it. Most people need a mortgage to get the home they want.
But they don’t just give mortgages to anyone. You have to meet certain requirements to get one. Below you’ll learn how to qualify for a mortgage so you know about everything you’ll need.
How To Qualify For A Mortgage
So, let us tell you the requirements and qualifications that lenders take a look at when you are applying for a housing loan.
The specific requirements for qualification may differ a bit from lender to lender. However, there are a number of things they all look at to determine if you qualify for a loan or not.
The things that mortgage lenders check when you want to purchase a house are the following.
- Income and employment
- Down payment
- Mortgage insurance
- Type of property
- Credit score
- Debt-to-income ratio
- Home appraisals
It helps to have at least a brief overview of each of these. So let’s take a look at each in a little more depth.
Income And Employment
Income is one of the first things lenders take a look at. They want to know how much you make and where it comes from. Basically lenders need to know that you have enough to cover your mortgage payments.
Lenders also check a person’s employment as it is the most common source of income. Income can also include:
- Military benefits and allowances
- Extra income from a side hustle
- Spousal or child support payments
- Income from investment accounts
- Social Security payments
Usually, the minimum down payment for conventional loans is around 3%. Lenders want to know that you’ll have enough to cover at least this amount.
If the down payment on a conventional loan is lower than 20 percent, then a Private Mortgage Insurance, or also known as PMI, may be needed. PMI is a type of insurance that aims to protect lenders in case you default on your loans.
But if your down payment and credit score is high, then the PMI is lower, if you pay any at all.
Type Of Property And Occupancy
The type of property that you want to purchase can affect your ability to get a loan. For example, you may get a single family home or maybe a condo.
Primary residences have lesser risk for lenders, thus allowing them to extend loans to more people.
On the other hand, investment properties require a higher credit, down payment, and debt standards.
Occupancy on the other hand is how much time you’ll be spending in the home. For example, you can purchase a second home as your vacation home. You won’t spend much time there as compared to your primary home.
Lenders also take a look at your assets. This is to ensure them that you can still pay your down payments in case of a financial emergency. Assets may include:
- Checking and savings accounts
- Certificates of deposit (CDs)
- Stocks, bonds and mutual fund
Having a high credit score improves your chances of qualifying for a mortgage. And also helps you get lower mortgage rates. On the other hand, if your credit score is low, a lender will see an increase in the risk of giving you a mortgage.
For lenders to know that you have enough money to pay your payments they calculate your debts and income. This is also known as DTI ratio.
How to qualify for a mortgage comes down to having numbers as strong as possible in the above categories. It also will depend on the individual mortgage lender. So, if you have trouble qualifying with one lender, you might have more success with another.