How Lenders Decide if You Qualify for a Mortgage

When it comes time to apply for a mortgage, you may be dreading the process. This is rather common, as applying for any type of loan is one of the least favorite things a person can do.

It’s not fun to figure out where you keep all the necessary paperwork needed. In addition, there are so many hoops to jump through and you’ll likely feel a bit violated by the time it’s over.

Regardless, it’s nearly impossible for most buyers to get a home without a mortgage. This means you should understand how lenders look at your creditworthiness and everything else. Here’s a quick guide to help.

Income vs. Expenses

One of the major factors when deciding if you qualify for a mortgage and how much you qualify for is your income vs. your expenses. This is used to create your debt-to-income ratio, which is used to see if you can afford the home.

Most lenders want your home expenses to be no more than 28% of your gross income. If you will be going over this mark, a larger down payment may be necessary or you may need to shop for a less expensive home.

Understanding What Counts as Income

One of the strangest things you will encounter when applying for a mortgage is figuring out what counts as income. Some of this is easy, especially if you have a traditional job where you received a regular paycheck. However, you may have other sources of income to consider, too.

Maybe you’ve taken on freelance work or a second job to help save for the down payment. Some lenders won’t allow this income into the picture unless you’ve been doing the work for at least a year, maybe two. In addition, you’re bonuses, overtime pay and commissions may be ignored if they are not steady, regular income.

Those receiving child support or alimony will need to show proof for at least one year and proof that it will continue for at least three more years or it won’t be counted. This goes for other sources of income, as well.

If you work for yourself, this gets even more complicated. You will likely feel like your lender absolutely hates you because the hoops for you just got higher and harder to jump through. Since you write off a ton of things on your tax filing, you won’t show as much for income. However, some lenders will make this process easier on you and it’s good to find one specializing in working with self-employed borrowers.

Debt-to-Income Ratio

While the 28% figure is just your housing expenses compared to your gross monthly income, your lender will also want to look at your total debt-to-income ratio.

Most lenders don’t want your overall debt-to-income ratio to exceed 36%. This will include throwing in car payments and any other debts showing up on your credit report. If you’re DTI is too high, you can pay off a credit card or a car loan to help you qualify for the loan.

Down Payment Ready to Go

Another thing lenders look at to make sure you qualify for a mortgage is your down payment. Do you have it saved in an account ready to go? Is it big enough?

If you will be receiving the down payment as a gift, there will be rules you will need to follow for this. A gift letter will likely be necessary, along with showing a paper trail. Many lenders will only allow you to accept up to 6% of the purchase price in a gift for your down payment.

If you have a down payment of 20% or more, you will find this qualification much easier. Those with a lower down payment will likely find this portion of the creditworthiness a bit harder.

Your Actual Credit

Of course, the credit report and score pulled by your lender will play a factor in the decision, as well. A high score (750 or higher) will make things much easier. However, if you have a score of 680 or higher, a conventional mortgage will likely work for you. Those with a credit score under 680 may need to look for a non-conventional lender and any score under 620 may find getting a mortgage to buy a home difficult.

Plenty goes into the way a lender decides whether you qualify for a mortgage or you don’t. This is just a short, simple guide to help you. If you really want your questions answers, contact a lender and find out what they will need from you to get you qualified for a mortgage