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    Qualifying for a Home Loan

    Types of Home Loans:

    If you are currently renting, you may be considering purchasing a home. The qualification process is not nearly as difficult as you may believe. Your actual qualification is based on the type of loan you choose. Private lenders offer conventional loans but there is no government guarantee. Private lenders also offer government-back mortgages that are insured or guaranteed by the government.

    Some of the other options include FHA loans, VA loans, and USDA loans. You can apply for these loans through a private lender provided they are participating in government programs. You can also apply for a conventional loan which includes conforming loans and non-conforming loans. Your final options are non-qualified and qualified loans. No matter which type of loan you apply for, you must qualify.

    Income

    The first part of the qualification process is your income. You must have an income large enough to make your mortgage payment in addition to any other bills or debts. When evaluating your income, the lender will consider:

    • Income
    • Overtime
    • Additional income from side hustles
    • Investment account income
    • Military allowances and benefits
    • Commission
    • Payments for child support or alimony
    • Social Security payments

    Your income must be consistent to qualify for a home loan. Most lenders will only allow income to continue for the next two years. A good example is if you are receiving payments for child support set to expire in six months, the lender will most likely not include these payments as part of your income.

    Assets

    Your lender will require assets to ensure you can pay your mortgage if there is an emergency and you may be required to provide verification. Assets have value and include:

    • CDs
    • Savings and checking accounts
    • Retirement accounts including 401(k)s and IRAs
    • Mutual funds, bonds and stocks

    Type of Property

    Qualifying for a home loan is also dependent on the type of property you want to purchase. The simplest property to purchase is a primary residence. This is a home you will be living in for the majority of the year. Primary loans are easier to acquire because there is less risk to the lender. This is because if you have an unexpected expense or lose your income, the chances are good you will prioritize your mortgage.

    Some of the loans backed by the government are only valid if you are purchasing a primary residence. If you intend to purchase an investment property or second home, the down payment, credit, and debt standards are higher because the risk is greater for your lender.

    Credit Score

    Your credit score is a numerical rating consisting of three digits reflecting your reliability as a buyer. If you have a higher credit score, you are careful with your spending, do not have a lot of debt and your bills are paid on time. If your credit score is lower, you may have more debt than you are able to afford or frequently pay your debts late.

    If you have a high credit score, you will have access to a lot more loan types and receive a much lower interest rate. To qualify for the majority of home loans, your FICO credit score should be a minimum of 620 points. If your score is lower, consider applying for an FHA loan. This type of loan is backed by the government and offers lower standards for income, debt, and credit. You can qualify for an FHA loan with a minimum credit score of approximately 580. If your down payment is at least 10 percent of the value of your mortgage, you may be able to qualify with a credit score of just 500 points. Your down payment will be required at closing.

    Debt-To-Income Ratio

    Your income must exceed your debt ratio so you can pay all of your bills including a home loan. If you only consider your income, it is difficult to determine your debt-to-income ratio or DTI. This is a percentage determining how much of your income is required to pay your monthly bills. Calculating your DTI begins by adding your monthly fixed payments together. Only expenses that do not vary should be included such as:

    • Minimum credit card payments
    • Rent
    • Payments for student loans

    You most likely also have recurring payments you must make every month. Include your minimum payment for each installment. A good example is $10,000 in student loans with a monthly payment of $100. Your calculation will be for $100 as opposed to $10,000. Do not include premiums for health insurance, expenses for entertainment, and monthly utility bills.

    Your total monthly expenses are now divided by your household income before taxes. Your calculation should include all reliable and regular income from every source. The number you have is then multiplied by 100 to determine your DTI ratio. A lower DTI ratio will make you a more desirable borrower. The general rule is your DTI ratio needs to be 50 percent or less to qualify for most home loans.

    Improving Your Home Loan Application

    If your credit score or finances are not quite good enough to qualify for a home loan, you need to take steps to improve your application to increase your chances of qualifying.

    Improving Your Credit Score

    Your credit score is one of the main factors in qualifying for a home loan. Taking the steps necessary to improve your score will help you qualify for more loan types and lower interest rates. Your first step is to make all of your payments on time. Once you have established a history of paying on time, your credit score will improve. A good option is to begin a ledger including the due dates for all your credit card payments and loans.

    Every time you make a payment, write it down in your ledger. Make certain you always pay at least the minimum amount due. Be careful how much you charge monthly on your credit cards. If you use them too often you are considered a higher risk. Use 30 percent or less of the available credit you have monthly and you will improve your credit score.

    Paying down your debt demonstrates you are able to manage your finances. You need to show the lender you do not borrow money unless you are able to pay it back. Paying off your debt early will significantly improve your credit score.

    Making A Larger Down Payment

    The more money you put down on your home, the smaller the loan you will need. Your loan then presents less risk for the lender in the event you default. Putting away money for a bigger downpayment makes you a more desirable candidate and you may receive some slack in some of the other areas. You have several options to save up for a better downpayment including:

    The Side Hustle: Working a side hustle makes it much easier to earn more money in addition to your regular job. You can find tasks on numerous websites, deliver food through apps or for local restaurants or work for a ride-sharing service.

    Budgeting for Savings: Thoroughly examine your monthly budget. Determine where you can make cuts to put away money every month. Opening a separate saving account for your downpayment will help ensure you are not tempted to spend the money.

    Have a Sale: Have an old fashioned garage sale or sell a few things you do not need online. Selling things you no longer want or need is easy. Take a good look around your home and either schedule a garage sale or start listing items online.

    Decrease Your DTI Ratio: Decreasing your DTI ratio will give you more money for a down payment. You will also become more appealing to lenders. You can decrease your DTI in two different ways. Both methods will require some effort on your part, but will also greatly improve your chances of qualifying for a home loan.

    Increasing Your Income: You can increase your income by working more overtime, working a side hustle, or asking your boss for a raise.

    Decreasing Your Bills: Use any extra money to reduce or pay off your debts. You can also downsize to decrease your expenses.

    Government-Backed Loans: One of the special financing classes is government-backed loans. These types of loans include federal government insurance. If you default on your home loan, your mortgage will be covered by the regulating body. Since these loans are not as risky for the lender, the standards are lower. To qualify for a government loan, you must meet specific criteria depending on the specific type of loan.

    VA Loans: The Department of Veterans Affairs backs all VA loans. You do not need a down payment to purchase a home with a VA loan.

    USDA Loans: The United States Department of Agriculture insures all USDA loans. You can purchase a home in a qualifying suburban or rural area without a down payment.

    FHA Loans: The Federal Housing Administration insures all FHA loans. The income and credit score requirements are not as strict. You can qualify for a mortgage with a minimum of 3.5 percent down.

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