Income, credit and debt requirements for a loan


If you are wondering how to qualify for a mortgage, you are not alone. Have you just walked into a bank with a checkbook, hoping for a good mortgage rate and a smile? Barely! Mortgages are not for just anyone, they require a lengthy selection process. If you’re a first-time home buyer, it can be difficult to figure out what you need to get a mortgage. But we’re here to help.

How to qualify for a mortgage

Just so you know all you need to bring to the table when you need to qualify for a mortgage, here is a guide on how to please the lending gods so that they deem you worthy to receive a huge sum of money. and a great mortgage rate – and what if you haven’t quite covered those basics yet so you can be successful early enough.

Let’s go! First of all, you need to put together a mess of paperwork from bank statements to pay off tax and W-2 stubs. But in addition to the paperwork, there are a few other things you need to get a mortgage loan. Here are the must-haves:

A good credit rating

When you apply for a mortgage, lenders check your credit rating to determine if you are a low or high risk borrower. The higher your score, the better you look on paper and the better your chances of getting a great loan.

While a perfect score is 850, research suggests that only about 0.5% of consumers reach this coveted brand. As a result, scores of 760 and above are considered to be in the best range from a mortgage lender’s perspective. This means that you would be eligible for the best interest rates (i.e. the lowest), says Richard redmond, mortgage broker with All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide”.

A good credit score is 700 to 759; a fair score is 650 to 699. If you have multiple flaws in your credit history (eg, late credit card payments, unpaid medical bills), your score could drop below 650. If so is the case, a conventional home loan and will need to repair your credit in order to be approved (unless you qualify for a Federal Housing Administration loan, which requires a minimum credit score of 580).

Your first step should therefore be to check your credit report, says Beverly harzog, consumer credit expert and author of “The Debt Escape Plan”.

You are entitled to a free copy of your full report at The report does not include your score – for this you will have to pay a small fee – but just reading your report will give you a rough idea of ​​how you are doing by exposing issues like late payments or missing. Some credit card companies, including Discover and Capital One, also offer customers free access to their scores and reports.

You should also verify that you are the person responsible for any black marks appearing on your report. It’s more common than you might think: A Federal Trade Commission study found that one in four Americans spotted errors in their reports.

If you have poor credit, it may take you several months to increase your credit score to a range where you can qualify for a mortgage. (Here are tips on how to improve your credit score.)

Substantial and stable income

The income you need to get a mortgage comes down to your debt-to-income ratio; this figure compares your income on your tax returns with your unpaid debts. To qualify for a home loan, the income from your work must be high enough to offset your debts, including any mortgage payments.

To calculate your DTI ratio, figure out how much debt you are paying per month, counting things like car payments, student loans, and credit card bills, and divide that amount by your monthly income on your pay stubs. .

Say, for example, that each month you pay off $ 250 in debt and pull out $ 5,000. Divide $ 250 by $ 5,000 and you get a DTI ratio of 0.05, or 5%. That’s well below the recommended rule of 36%, according to David Feldberg, broker and owner of Coastal Real Estate Group, in Newport Beach, California. Keep in mind, however, that you do not yet own a home, which will increase your DTI.

Once you know your income and debt, you can use an online affordability calculator to see how much you can shell out for a new home, while still staying below that 36% DTI ratio threshold.

Take the example above where you earn $ 5,000 per month and pay off $ 250 in debt. Now suppose you have about $ 30,000 for a down payment, and you can get a 30-year mortgage at a fixed interest rate of 5%. Enter those numbers into a home affordability calculator, and it will put you in the order to afford a home worth $ 243,100.

Plus, lenders like to see at least two years of constant income history, says Todd Sheinin, mortgage lender and COO of New America Financial in Gaithersburg, Maryland.

This creates a barrier for many workers who are just starting their careers or who are self-employed. If you are in the latter situation and have variable income, you may need additional assets such as a larger down payment (more on this later) in order to qualify for a mortgage.

A sufficient deposit

Most mortgage lenders like to see that you have enough in the bank to make a 20% down payment, which works out to $ 50,000 for a $ 250,000 home. (And they’ll be looking at your bank statements.) So if you haven’t saved up that much, it’s time to start pinching a few pennies so you can start making those mortgage payments! But there are other options as well.

FHA guaranteed loans allow borrowers to make down payments as low as 3.5%. If you served in the military, loans from the Department of Veterans Affairs do not require a down payment. Only eligible for a classic loan? Expect to need a down payment of at least 10%, says Sheinin. However, if you put less than 20% on a conventional loan, you will have to pay for private mortgage insurance, with a monthly premium that can range from 0.3% to 1.5% of the total loan amount.

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