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.
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 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 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. The same process would be employed.
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.
(What credit score do I need to get a mortgage?)
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.
But if your credit score is above 720 and you’ve got some decent history to back it up, that shouldn’t be a hurdle.
Tip: Generally lenders want to see a minimum of 3 active credit tradelines with two-year history on each.
As far as job history, it’s important to show the mortgage underwriter that you’ve had a steady job, typically two years or longer.
This essentially proves that you will continue to receive regular income to make those costly mortgage payments.
If you just graduated and have held a job for two months, don’t expect to qualify for a mortgage unless you’re a doctor or something else extremely in demand.
(What mortgage can I afford on my salary?)
You’ll also need to consider the mortgage down payment requirements.
Zero down mortgages are pretty much gone, so if you don’t have any assets set aside to put into the home purchase, you may be stopped in your tracks.
Obviously, the amount of money needed will vary 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
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 the commitment? Would you lend you a mortgage…
(How much house can I afford?)
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
- Income – verifiable income for the past two years that meets debt-to-income ratio limits
- Assets – enough to cover down payment and at least two months of mortgage payments
If you can’t satisfy these requirements, you may want to keep renting, saving, and working on your credit until you can. Or consider a co-signer who is qualified to apply for a mortgage. Either way, shop around so you know all your options!
Read more: Tips for first-time homebuyers.
