How to Qualify for a Mortgage Loan

Getting a house is probably one of the biggest decisions you will make, and with that decision comes the issue of qualifying for a mortgage. There are really three major aspects of mortgage loan qualification. They are income, credit, and collateral. Generally speaking, you will need to meet all three conditions to qualify. If you have a great relationship with your lender, you may be able to work around certain aspects.

INcome

Income is probably one of the most important parts of the home loan application process. A lender can look past poor credit by giving you a higher interest rate, or poor collateral by having you put more money down. But without sufficient income you are inevitably facing a denial. The general rule of thumb is that your total debt to income should not exceed 42% of your total gross income. This means that if you make $5000/month, your total credit reporting debt load can not exceed $2100/month. Your credit reporting debt load will include your mortgage, credit cards, and personal loans. In general a lender will also not want your mortgage to exceed 28% of your gross income. This ensures you have room for other financing if you should need it such as a car loan. Different lenders may have different DTI ceilings, but generally it will be 42%.

Credit

Credit in my opinion is the second most important aspect of the home loan process. Without good credit you may not be able to qualify, and if you do qualify the loan will come with a higher interest rate. A great tool to check on your credit is Credit Karma, plus its free to use. Make sure that all of your accounts are in good standing, you have no collections, and you are not taking on too many inquiries at once. The difference of having a lower interest rate makes a massive difference both on your overall payment, and how much you interest you pay over the life of the loan. Take for example an interest rate of 3.5% if your score is 721 or higher, vs a rate of 3.6% if your score is between 681 and 720. Over the life of a 30 year, $100,000 mortgage you will pay an additional $2,158. It your score is even lower and you get say a 4.25% rate, then you would pay around $15,743 more. That may not seem like a lot, but if you were able to invest the difference at an annualized rate of 8%, you would have had around $61,596. That is a large amount of money to miss out on! If you don’t have credit established yet but want to qualify for a loan in the future, check out our article on how to start building credit here!

Collateral

Collateral will be the third aspect of the loan that your lender will look at. There are different kinds of financing whether you are looking at a fixed rate loan, or an adjustable rate loan. Fixed rate loans will require 0-20% down but will generally come with higher loan costs, private mortgage insurance, and a higher interest rate. Adjustable rate loans require 15-20% down, but can be easier to get for self employed individuals if you have a relationship with your bank, generally have lower fees, as well as a lower introductory interest rate. No matter which route you go the lender will have an evaluation of appraisal done on your prospective purchase. As long as the home appraises for the sale price or higher you will be good to go. If however the home appraises for less than the sale price, your lender may require you put more money down or not do the loan at all.

This article really just highlights the main points of the home loan application process. There is a lot more to it, but your lender will take care of most of that work. The big things to keep in mind are to focus on keeping your credit reporting bills less than 42% of your income, pay your bills on time to keep your credit up, and make sure you are not grossly over paying for your home.