Do I Qualify for a Mortgage?

January 23, 2012 10 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.

Compare Today’s Mortgage Rates

10 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!

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