What You Need to Qualify for A Mortgage
Want a mortgage, but not sure where to begin? This guide will give you some tips to get you started, giving you a sense of what most lenders will require from you, the borrower!
When applying for a mortgage, it’s very important to have a source of income. Lenders need to see that you have income so that they will feel comfortable lending to you. Without income, there is no guarantee that you will be able to meet your monthly payments, and just like you, lenders want to see a return when they invest their money in your mortgage. For most lenders, a borrower with a steady source of income is essential for them to move ahead with the mortgage.
If you don’t currently have a steady source of income, there are other alternatives. Some lenders may approve you without an income if you are between jobs, or are retired and have lots of assets. If you can prove that you have assets to cover the mortgage loan you want, you may still qualify for a mortgage!
Besides income, another extremely important factor when trying to qualify for a mortgage is your credit report. According to the Consumer Financial Protection Bureau, your credit score predicts how likely you are to make your monthly mortgage payment on time. This credit score is calculated using your payment history, the length of your credit history, amounts owed, new credit, your credit mix, and other factors. Making your credit payments on time, using your available credit wisely, and making sure not to open multiple credit accounts at the same time may positively affect your credit score and help you to qualify for a mortgage.
Even if you are doing all these things now, actions in the past that are still affecting your score may keep it lower than you’d like. Most mortgage lenders would like to see credit scores of 640 or higher, and ideally, your credit score will be 680 or above. But even if your score is as low as 580, it’s still possible to get a mortgage, since some lenders are willing to lend to people with low credit scores. Sometimes it’s even possible to get a mortgage with no credit history!
Your debt-to-income ratio, much like your credit score, is a way for mortgage lenders to understand your financial situation and assess your financial health. For lenders, it’s another way to know how much risk they are getting themselves into when they lend to different kinds of borrowers.
This is calculated by adding up the minimum payments for all your monthly debts and dividing that number by your monthly income before taxes are taken out. The result is your debt-to-income ratio, which is a percentage. The lower your debt-to-income ratio, the better off you are when it comes to getting a loan. Most lenders like to see a debt-to-income ratio that is lower than 43%. But some lenders may approve loans if your debt-to-income ratio is higher – it’s just a little more complicated.
Once you’ve considered your income, your credit score, and your debt-to-income ratio, it’s time to start applying for a mortgage! Some lenders will even allow you to apply for free. Good luck!