How to Qualify for a Mortgage in Today’s Market – Ready to take the leap from renting to owning? Investing in real estate is one of the best things you can do for your financial stability and the future of your family.
If you are new to buying real estate, you may be wondering what it takes to qualify for a mortgage. Don’t worry, we’ve broken it down for you here. And, as always, our friendly and professional loan officers are always ready to answer your questions and help you discover what you qualify for.
How to Qualify for a Mortgage in Today’s Market
What is mortgage qualification?
The process of qualifying for a mortgage begins with being pre-approved. This is simply the process of a loan officer looking over your personal information and determining whether you will qualify for a mortgage, and how much you will qualify to borrow.
After the pre-approval process is complete, you can shop for a home. When an offer is accepted, the final qualification process will take place during the escrow period, when the lender’s underwriters review all of your financial information and finalize your approval.
What do mortgage lenders look at to determine pre-approval?
Mortgage lenders look at a variety of factors to determine whether you are ready to take on a loan, basing their expectation of your ability to repay the loan on multiple facets of your financial situation.
Income and Employment History
Your income and employment history help the loan officer determine what you can afford. They will want to see what your take-home pay is, as well as how long you have been working at your current employer.
An employment history of 2 years of more is ideal, but in some cases this will not be necessary. The idea is that your lender wants to see stable employment and a reputation of consistent work.
Remember, income is not just limited to your salary, but to alimony, child support, Social Security payments, military benefits, income from investment accounts, and other sources of regular income.
Debt-to-Income (DTI) ratio is a way lenders determine your capacity to take on on new debt. This is the ratio of your current monthly debt payments to your monthly income. For example, if you make $5,000 per month and spend $1,000 each month on debt payments, your DTI is 20%.
As a general rule, most lenders require your DTI to be under 45%. This number will vary from lender to lender, but keep in mind that the lower it is, the better your mortgage rate and terms will be.
Your credit score is a three-digit number between 300 and 850 that reflects your ability to handle debt. Lenders will look to your credit score as a reflection of your ability to handle mortgage payments.
Credit scores are determined by combining a list of factors, including:
- the number of credit accounts you have open
- your payment history
- your utilization rate
- how long you have had credit
- the types of credit you have
Credit scores are divided into tiers. In general, credit scores under 579 are poor, 580-669 are fair, 670-739 are good, 740-799 are very good, and 800-850 are excellent. Any credit score about 620 is generally high enough to qualify for good mortgage terms.
Your lender will also review your assets, including:
- checking accounts
- savings accounts
- Certificates of Deposit (CD)
- stocks, bonds, and mutual funds
- 401(k)s, IRAs, and other retirement accounts
This helps the lender determine your ability to pay your mortgage if something changes in your employment.
What happens if I don’t qualify?
In some cases, you may not qualify for a mortgage yet, or you may not qualify for the amount you were hoping for. If so, don’t worry! Find out why you didn’t qualify and focus on strengthening that factor of your financial situation.
For example, if your credit score isn’t quite high enough, spend a few months focusing on quickly increasing your credit score and applying again.
If your DTI is the issue, focus on changing that ratio in your favor by actively paying down debts, finding an additional source of income, or both.
Whatever the issue, our loan officers are happy to help you determine your next steps. Remember: if you do not receive mortgage pre-approval, it’s a “not yet,” not a “no.”
Still have some questions? We are here to help. Schedule an appointment with a loan officer to learn more about how to qualify for a mortgage and buying your first home.