Do I Qualify for a Mortgage?

January 23, 2012 26 Comments »
Do I Qualify for a Mortgage?

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.

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 credit 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 goes, it’s important to show the mortgage underwriter 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 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.

[What mortgage can I afford on my salary?]

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, 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

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 (recent graduates 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

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.

26 Comments

  1. Margaret A. Rothenhoefer May 19, 2012 at 12:32 pm -

    Thanks for all the info! I’ve been looking for this information for years! Somehow it has always seemed like both the real estate and financial industries like to keep consumers in the dark, and nobody is born knowing all this stuff. . Keep up the good work!

  2. Octavio July 11, 2013 at 4:33 pm -

    Hi, I have a 680 credit score and have been working in the same job for 3 years. I also have some money saved up for a down payment. Does this sound good enough to qualify for a loan? Your web site is really useful. Many thanks for the great info!

  3. Colin Robertson July 14, 2013 at 2:56 pm -

    Hey Octavio,

    It sounds like your credit score is sufficient, though you might want to work on it to get it above 720 in order to obtain a lower rate. Your employment also sounds good, and I don’t know how much you’ve saved up, but generally you need at least 2 months of mortgage payments for reserves. Speak with a bank and or broker to get pre-qualified. They can run your actual numbers to give you a more concrete answer.

  4. Margo July 17, 2013 at 2:56 am -

    I have good credit, assets, and a steady job, and still got denied for a mortgage. But I’m self employed, so there are more restrictions. Be careful with how you handle your income/taxes for a personal business, it could be grounds for denial.

  5. Alphonso August 29, 2013 at 8:49 am -

    I don’t have any credit cards…I hate them. Can I still qualify for a mortgage without them?

  6. Colin Robertson August 30, 2013 at 11:53 am -

    Yes, though lenders like to see a few lines of credit. If you have auto loans/leases, or student loans, those can work as well. Or any other line of credit. You may also be able to use alternatives like utility bills and/or cell phone bills to establish credit.

  7. Karey Homebuyer January 15, 2014 at 4:49 am -

    Do the new Qualified Mortgage rules make it a lot more difficult to qualify for a mortgage? And if so, how?

  8. Colin Robertson January 16, 2014 at 11:06 am -

    It’s somewhat early to be sure, but the max DTI ratio is now 43%, though there are exceptions to that rule. My assumption is that once lenders wrap their heads around the new rules, it will be business as usual. The same stuff still applies, good credit, plenty of assets, and a solid job/income and you’ll be fine.

  9. Shannon August 25, 2014 at 12:36 pm -

    My husband and I recently just paid off all our debt except my car payment and a small student loan (together payments = $600). Our credit is a little on the rough side, but we have good assets ($200k in stock, $15k in 401k and $8k liquid), an good job history. How long after our debt shows $0.00 balance on our credit should I wait to obtain a pre-approval? Found a house we love for our family and dont want to lose it. Are there loans out there for that will approval people with bad credit?

  10. Colin Robertson August 25, 2014 at 3:45 pm -

    Shannon,

    It might take some time for those paid off balances to reflect in your credit score, but if your credit is on the rough side, I’m assuming something bad happened to make it that way, not just an outstanding balance. So paying off the loans may not make a huge difference. If you’re really in a hurry, you can pay for a rapid rescore to get your credit scores updated in a matter of days, but it may not have the desired effect. Either way, if you want a house and don’t want to lose it, you should probably take action sooner rather than later. Good luck!

  11. Ada Merrill March 2, 2015 at 7:21 am -

    I have a family daycare for 5 years. my credit score is 720+. how do i qualify for a no documentation loan?

  12. Colin Robertson March 2, 2015 at 10:53 am -

    Ada,

    Nowadays it’s tougher to find a lender willing to offer a no doc loan. Did you check to see if you qualify with your own income? More common today are asset-based loans, which rely on assets when income falls short, but you need a healthy amount of assets to qualify.

  13. Matt March 16, 2015 at 10:19 am -

    I moved from the UK to Baltimore in November to start work at an IT Consultancy. I had been IT consultant in the UK for 12 years and working in IT in USA for 6 years prior to that and I’m a US citizen. I’ve been paying off car loans and paying off credit cards since November and recently increased a credit card limit from $500 to $2000 this past month but the FICO score showed 677 on the application.

    We’re renting a house we own in the UK and we also are ourselves renting a house in Baltimore that we want to buy soon. Is the FICO score unlikely to increase more than few points in the coming month or 2? We were hoping to get over 700 or close to 720 as you advise.

    If we put 25% – 30% down are we more likely to get a decent rate or considered for a good mortgage?

  14. Colin Robertson March 16, 2015 at 1:50 pm -

    Matt,

    It depends why your score is that low to begin with and subsequently what can be improved in a short period of time. Might be worth digging into your credit report to determine that. A down payment of at least 20% helps you avoid mortgage insurance, and an even larger down payment may lower your rate and improve qualification chances. Good luck!

  15. Kerry May 6, 2015 at 8:40 am -

    I have a 665 fico score, a 27%debt to income ratio, have been at my job for 11 years, and can put 35% down. My annual salary is $67,000, and I want a house that costs $150,000 ($115,000 after down payment). Will my credit score hurt my chances of getting this mortgage?

  16. Colin Robertson May 6, 2015 at 9:12 am -

    Kerry,

    Your score may hurt your chances depending on why it’s that low, and it could also lead to a higher interest rate on your mortgage. You may want to investigate why it’s low and how you can raise it before applying.

  17. Jo Jo June 17, 2015 at 3:57 pm -

    My credit score is 782. Never had any defaults/late payments/bankruptcies. I make $61,000/annually. I’ve been employed at the same company for 10 years. I have an auto loan in the amount of $22,000.00 and one credit card balance of $200.00. My monthly debt payments amount to $400.00. I’m in contract now to purchase a home for $280,000 with a down payment of $56,169.90 – Loan will be for $224,000. I have $61,000 in checking and savings. My loan is currently in underwriting with BMO Harris as of June 17, 2015.

    One caveat: I divorced last year. My ex and I agreed he’d take the marital home, valued at $400,000, with a $294,000 BMO Harris mortgage. The Divorce Decree orders my ex to refi or sell no later than Oct. 1, 2015 or the court will order the sale to remove my name/liability from the mortgage debt. My BMO loan officer contacted Freddie Mac. Freddie Mac advised that as long as we can document that my ex-husband is paying that mortgage on his own (for the last 12 months), that debt will be excluded from my DTI ratios. BMO has in their possession the cancelled checks from my ex showing that he paid the mortgage on his own for the last 12 months.

    Still, I worry I won’t be approved.

    What are your thoughts Colin?

  18. Colin Robertson June 18, 2015 at 9:35 am -

    Jo Jo,

    It sounds like you’re doing everything the right way and by the book so just be patient and do what they ask of you to get the loan closed. I know it’s stressful, even if you’re a perfect borrower!

  19. td October 19, 2015 at 6:15 pm -

    We were just denied a mortgage from Union Bank because they said our debt to income was too high (off by .1%). They won’t show us or explain how they calculated their numbers. I researched extensively before applying and our numbers are over 5% lower than theirs. Our income and debt is fairly simple. I have owned 10 homes and have an MBA and great credit and stable income. Is there any law that says they have to disclose how they calculated the ratios? They wanted me to buy the rate down to qualify. I said show me the numbers–they would not. Is it like they wanted to make more money on the loan and they can do this by the way they calculate dti. Any thoughts?

  20. Colin Robertson October 20, 2015 at 3:15 pm -

    TD,

    Can’t you just pay something down to get it 0.1% lower? Not sure I’d make a big stink about it, but perhaps have them work to get that number down without buying down the rate if you don’t want to do that…or go elsewhere.

  21. Ak November 27, 2015 at 7:39 pm -

    My husband and i are looking to build a brand new house. I work a seasonal position and am unemployed at the moment with not a sure plan of going back to work for the same company. My husband however has been working for the same company for 13 years and recently there has been rumors stating they may be closing the venue down. This will lead my husband into unemployment for the time being.. however he does have substantial amount of money saved and no debt besides the current home we own, which we plan on selling if we go with this house. So our biggest worry is if we get approved now but by the time the house is finished and we are ready to close and his job closed down will we be denied of out loan? Since it will take some time to build this house and who knows if this job really is going to close or not.. we are torn if we should gamble it or be stuck.. but if were waiting for that date that may never happen we may never move.. what would be your advise? Thanks =]

  22. Colin Robertson December 1, 2015 at 11:39 am -

    Ak,

    Seems risky if you’re looking to build a new home while employment hangs in the balance. May want to look into construction-to-perm loans where you get the loan now for the construction and the eventual mortgage.

  23. Jo li December 19, 2015 at 11:31 am -

    I opened my first checking account 15 months ago they checked my score and I DIDNT HAVE ONE! Only thing on my report was a med bill that I’ve since paid and it’s removed from my report so to build some history the credit union gave me a 500$ credit card, about 6 months later I got a 300$ capital one ,6 months after that capital one raised My line of credit to 800$ I’ve never missed a payment and I carry very low balances I checked my credit recently and I now have a (696)* I have no assets but I recently just put money into my savings so my ? Is do you think I could get approved on a mortgage ? With my lack of credit history thanks

  24. Colin Robertson December 21, 2015 at 11:08 am -

    Jo,

    It sounds like you’re making the right moves to establish your credit history, savings, and so forth. You will also need employment history and income to qualify for a mortgage. It depends on the loan you’re looking to obtain, but you seem to be heading in the right direction. You might want to speak with some banks/brokers to see if you’re eligible. Good luck!

  25. Ellen Robison April 22, 2016 at 6:13 pm -

    Hi, I am a single 54 yr old woman, with credit score of 784. I have paid off a car loan and 2 credit cards which I never paid interest on, and I have no debt. I have over 6k in assets. I have always paid cash for my previous homes, including the one I live in now. I am in the process of selling my home to move to another. However, I may need to borrow a bit to get into a home in the state I am moving to before this home sells. I am disabled and my income is low. As soon as this place sells i will be able to pay the loan off in it’s entirety. All of the money I get for this place will be all mine as i owe nothing on it.
    Looking i the $78,000.00 range.
    Moving for health reasons, among others.
    What do you think?

  26. Colin Robertson April 23, 2016 at 10:47 am -

    Ellen,

    Probably best to get per-approved beforehand, but if you can pay off the future home in its entirety once you sell your old one it wouldn’t really matter too much what the new loan looked like seeing that it would only last a few months or so. You’d probably want to keep closing costs low to nil on the new loan in exchange for a slightly higher rate for the same reason.

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