Many of my buyers when I first meet them ask, what does
it take to get qualified for a mortgage? The below article
goes over this.
Factors that affect your mortgage pre-
approval Jenna Connour
Lenders start by looking at these three key areas of your
finances before issuing you a home loan pre-approval
A pre-approval is an essential step in the homebuying process that can
help you determine the price range of homes you can afford. While a
mortgage pre-approval isn’t required before you start searching for
homes, it can give you several distinct advantages when you’re ready to
commence the house hunt.
(By the way, if you’re looking for an even more powerful pre-approval,
we recommend a Platinum Credit Approval — which allows you to
make the next-best thing to an all-cash offer and helps your loan close
quickly after your offer is accepted.)
So, what are the factors that impact your pre-approval? It can be very
helpful to understand them before you start the loan application
process. While the pre-approval process varies slightly, depending on
the lender you choose, these are the three most critical items that
ultimately determine your mortgage pre-approval.
Credit Score and Credit History
A credit score is a three-digit number that represents an individual's
credit history and creditworthiness. Most credit scores range from 300
(very poor) to 850 (exceptional); and a “good” credit score falls between
670 and 739, according to the Fair Isaac Corporation (FICO).
Lenders use credit reports to determine the risk associated with
lending to a homebuyer and to make informed loan decisions.
To build or maintain a strong credit score, you’ll need to show a positive
payment history. Making consistent, on-time payments for loans and
credit card bills will not only boost your credit score, but it also shows
lenders that you would probably be a responsible borrower of their
funds.
Credit utilization is another important factor that determines your
overall credit score. This is the comparison of your credit card balance
to your credit limit. For example, if you have a credit card with a
monthly limit of $10,000, and you regularly charge $4,000 in expenses
on it every month, your credit utilization for that specific card would be
40%.
While some financial experts recommend keeping your credit
utilization below 30%, FICO advises keeping it below 10% and making
sure that you’re paying it off on time.
To take advantage of the best interest rate possible for their home loan,
all homebuyers should focus on improving their credit score. A high
credit score could also help you have lower monthly mortgage
payments (because of the lower interest rate) and could open the door
to more loan choices — giving you the best fit for your financial
Qualifying Ratios
Another key factor that mortgage lenders consider when evaluating a
mortgage application is the homebuyer’s debt-to-income ratio (DTI).
This is an important measure of your ability to manage your debt and
repay a mortgage. It compares your monthly debt obligations to your
monthly income. (Basically, the comparison of how much money you
have going “out” versus how much money you have coming “in” every
month.)
Your monthly debt payments include any payments you make toward
credit card debt, car loans, student loans, or any other outstanding
debts on a regular, monthly basis. Your estimated monthly mortgage
payments should also be included in this total amount.
To calculate your DTI ratio, add up your monthly debt payments and
divide that number by your gross monthly income. Use this easy
formula:
Monthly Debt Payments ÷ Gross Monthly Income x 100 = Debt-to-
Income Ratio
For instance, if your gross monthly income is $6,000, and your total
monthly debt payment is $2,500, you would calculate your debt-to-
income like so:
2,500 ÷ 6,000 x 100 = 41.67%
It is important to note that most lenders prefer a debt-to-income ratio
that is below 45%, according to Bankrate.com. This means that your
monthly debt payments should make up less than 45% of your gross
income per month.
If your debt-to-income ratio is higher than 45%, you may need a co-
applicant to qualify for a situation.
mortgage. A co-applicant (or co-borrower) is someone who applies for
the mortgage loan along with the primary borrower and shares in the
responsibility of repaying the loan.
By including all relevant monthly payments in the calculation
and working to lower your debt-to-income ratio, you can increase your
chance of obtaining a mortgage pre-approval.
Employment History and Income
The third important factor that determines your eligibility for a home
loan is your employment history and income. A lender will evaluate
these two factors to ensure that you earn enough to afford a new
mortgage payment and any associated monthly housing expenses.
Your employment history is one part of your background that helps a
lender discern your ability to repay the loan. The lender will ask for your
employer's name and contact information, your job title, and dates of
employment. They may also request a verification of employment from
your employer to confirm your income and employment status.
Next, the lender will review a more detailed breakdown of your income,
to determine if it is stable and reliable. This includes your job salary,
commissions or bonus income, and any other income sources, such as
rental income or investment income.
If you’re self-employed, the lender may request additional
documentation from you, so they can get a better understanding of
your financial picture.
The Bottom Line
While each of these three factors play a crucial role in your ability to get
pre-approved for a mortgage, it’s important to remember that
requirements vary from lender to lender — and from loan program to
loan program.
For instance, some loan programs may allow for a higher debt-to-
income if you have a more significant down payment amount. In this
case, if your debt-to-income was slightly higher than desirable, but you
had a solid amount of money saved for your down payment, you could
still qualify for the loan amount you’re hoping for.
In another case, you may have a credit score that could use some
improvement, but your income and employment history make you
otherwise financially ready to own a home; a reputable lender will take
this into consideration.
All this is to say: it’s important to consult with a qualified loan
professional about your unique situation. While these financial factors
are generally an important part of the mortgage pre-approval process,
regulations and qualifying figures aren’t universal for all loans. A
trustworthy lender will look at your full “financial picture” and use their
expertise to suggest various loan solutions that are specific to your
unique circumstance and goals.
Then, with your pre-approval in hand, you’ll feel confident and ready to
start the home search process.
Now that you are more educated on what it takes to get pre – qualified
for a mortgage loan, give me a call and we can take a look at what may
be the best next step for you.
Mary Cockburn/505-639-290/MaryCockburn.Realtor@gmail.com
