Sometimes I tend to skip past the seemingly basic mortgage questions, assuming everyone already knows the simple stuff. Unfortunately, that’s not the case, and much of what I think is simple isn’t really so straightforward.
So let’s talk about qualifying for a mortgage. Unsurprisingly, it’s actually a pretty complex process.
After all, you are asking a bank to loan you a ton of money for a long period of time. They’ll want to know you can actually pay it all back.
Mortgage Qualification Varies by Lender
The first thing I’ll say on this topic is that qualification for a mortgage can vary greatly from bank to bank.
Not every lender necessarily offers the same product, so some may approve you, while others may say, “no way.”
There’s also a little thing called “risk appetite,” and not every bank is as hungry as the next.
This illustrates why shopping around is paramount to secure the best deal, because one bank may agree to do business with you, but not at the best terms.
So it’s important to find the right lender for YOU.
Tip: A mortgage broker can shop your loan application with multiple banks and lenders all at once to find you the lowest rate with the fewest fees.
The Mortgage Qualification Process
If you’re interested in purchasing a home with the help of a mortgage (cash buyers need not apply), your starting point would be getting pre-qualified.
Essentially, a “pre-qual” allows you to first see if you’re even eligible for a mortgage, and secondly to determine how much you can afford based on income, asset, and credit score estimates.
So you basically tell a bank or mortgage broker that you do “X” job, make “X” amount each month, have “X” credit score, and can put “X” down.
At this point, they should go a step further and run some hard numbers, such as figuring out your debt-to-income ratio, to see what mortgage amount you can qualify for.
Assuming everything looks good, they may get you a more robust mortgage pre-approval, which is a commitment from a bank to lend you the money you need to make the purchase in question.
Of course, you can run the numbers on your own without anyone’s assistance if you’re just casually wondering. But the numbers you come up with might be quite a bit different, so if you are serious about buying, it’s wise to get a lender’s eyes on your financials.
Keys to Qualifying for a Mortgage
You’ll need to figure out if your credit score is up to snuff and whether you have adequate income to make the proposed mortgage payment each month.
Generally speaking, a credit score below 620 is considered subprime in the mortgage world and will make qualifying for a mortgage that much more difficult. If you’ve got previous foreclosures on your credit report, things will get even more problematic and you may not even be eligible for a certain period of time.
But if your credit score is above 720 and you’ve got some decent credit history to back it up, you shouldn’t have much to worry about there.
Tip: Lenders want to see a minimum of 3 active credit tradelines with two-year history on each.
As far as job history goes, it’s important to show the mortgage underwriter you’ve had a steady job, typically for two years or longer.
This essentially proves that you will continue to receive regular income to make those costly mortgage payments each month.
If you just graduated and have held a job for a mere two months, don’t expect to qualify for a mortgage unless your position directly correlates with what you studied in school.
For example, if you went to medical school, and now have a job as a doctor, this might be sufficient to qualify for a mortgage.
But if you were an art history student who has been working as a flight attendant for two months, mortgage lenders probably won’t feel comfortable lending to you. Make sense?
When seeking out your mortgage, you’ll also need to consider the mortgage down payment requirements, which vary depending on the type of loan you’re after.
Zero down mortgages are pretty much gone (though not totally), so if you don’t have any assets set aside to put into your home purchase, you may be stopped in your tracks.
Obviously, the amount of money needed will also vary based on the purchase price of the home. If you want a more expensive house, expect to put more down in order to qualify.
If we’re talking about a refinance, you’ll need a certain amount of home equity to qualify for the mortgage, as determined by loan-to-value ratio constraints.
Use Common Sense and Think Like the Lender
When it comes down it, it’s all pretty much common sense. Do you think you can qualify for a mortgage?
Do you have a track record of making on-time payments, carrying large amounts of debt and paying it down, holding a job, and saving money?
Are you ready to make a big commitment? If you were the bank, would you lend you a mortgage…hmm.
I would guess that most prospective homeowners could assess the situation beforehand and determine if they should be granted a mortgage.
But without running the numbers, you won’t know for certain. So be sure to do plenty of calculations and speak with a loan officer or two to see where you stand.
They’ll be able to get you a quick answer so no one’s time is wasted.
What You Need to Qualify for a Mortgage
Here’s a general list of what you need to qualify for a mortgage. Keep in mind that qualification requirements vary greatly by lender and loan type.
- Credit History – minimum of 3 active tradelines with 2-year history on each (credit score minimums vary)
- Job History – at least 2 years on same job or in same line of work (recent graduates with new jobs in certain fields may be exempt)
- Income – verifiable income for the past two years that meets debt-to-income ratio limits
- Assets – enough to cover down payment, closing costs, and at least two months of mortgage payments
- Rental History – proof of clean rental history for the past two years is also important to show the lender you have a propensity to pay on time each month (those currently living with their parents may be excluded from this rule).
If you can’t satisfy these requirements, you may want to keep renting, saving, and working on your credit until you can. Or consider adding a co-signer who is qualified to apply for a mortgage.
But don’t be discouraged. There are lots of programs and creative options out there to suit all different needs. One lender may say no while another says yes.
Either way, shop around so you know all your options!
Read more: Tips for first-time homebuyers.