Starting the mortgage loan application process should be fun and exciting, but it can also be nerve-wracking if you don’t know what’s expected of you. Below, Loan Remedy explains several of the things lenders look for in the preapproval process along with some tips that could help to increase your odds of qualifying. It is possible to feel confident throughout your house hunt and to be thrilled with your mortgage when that long-awaited closing day arrives. Here, you’ll learn how to negotiate a great mortgage process and outcome.
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Four things a lender considers
Mortgage qualification requirements often depend on the loan type, but in almost all cases, a lender will look at your debt, income, assets, and credit score in order to grant approval.
Steady income and employment history
While there’s no minimum salary requirement for buying a house, a lender needs two years’ worth of W2 wage statements as an assurance that you have a stable history of employment and steady income before they hand over funds for your home. This gives them peace of mind that you’ll be able to pay your mortgage consistently each month in addition to your other bills. In addition to paystubs, the lender will likely call your employer as well to verify your employment status and pay rate. If you’re self-employed, there will be lots of additional documentation needed to verify your financial stability.
Salary isn’t the only thing lenders investigate. They also determine whether you have other consistent sources of income, such as commissions, child support, alimony, military benefits, overtime, investment income, and so on. Be sure to make your lender aware of these, as extra sources of income like these may increase the loan amount you qualify for, but you’ll need the documentation to prove it.
Tip: Avoid switching jobs in the months leading up to (or during) your loan application. Lenders may be hesitant to give funding to someone who changes jobs, as it makes you seem like a greater risk.
The debt-to-income ratio (DTI) is a percentage that tells a lender how much of your gross monthly income you have available after making debt payments. You can calculate your DTI by dividing your total debt by your gross income. For instance, if you have $2,000 in monthly debts and your gross monthly income is $5,500, you’d divide 2,000 by 5,500 and get a DTI of 36%. Most lenders prefer that your DTI is 45% or less.
Tip: Lower your DTI ratio by picking up a side job to increase your income, asking your boss for a raise, paying down debts, and/or eliminating unnecessary monthly expenses. Do not take on any new debts (personal loans, auto loans, credit cards, etc.) within the six months leading up to your mortgage application, as it will increase your DTI.
If you aren’t familiar with credit scores — these are the three-digit numbers that lenders use to determine your reliability as a borrower. The higher your score, the more responsible you have proven yourself to be with your on-time payments and spending habits. For the vast majority of loans, including conventional loans, you will need a credit score of 620 or higher to qualify — but lenders tend to reserve the best interest rates for those with credit scores in the mid-700s and above.
Government-backed loans, however — such as FHA loans and USDA loans — have very low credit requirements if the borrower can offer a modest down payment while VA loans have no credit requirements at all (although the lender may have their own requirement).
Tip: You can improve your credit and secure better mortgage rates by paying off debts where possible, utilizing no more than 30% of your available credit at once, and making payments on time.
Before you close on a home, your lender wants to know that you have savings to pay a down payment and prove that you could still pay your mortgage if you were to fall on hard financial times, so they’ll ask about your assets. The more assets you possess, the bigger the loan amount you can be approved for. Having valuable assets assures your lender that, if your income was disrupted, for example, you could sell your assets to keep up on mortgage payments until things stabilize. Assets can include everything from checking and savings accounts to retirement funds and investment accounts to vehicles, artwork, jewelry, and more.
Tip: If you have meager assets and no savings for a down payment, it’s never too late to start saving. Set aside as much as you can afford to in the months leading up to your mortgage application. There are also government-backed loans, such as USDA loans and VA loans, that don’t require any down payment.
Tip: Do not deposit large sums of untraceable money into your bank accounts. This looks suspicious to lenders when they examine your bank statements even if it’s simply a gift from a loved one. If you must do this, your lender will want to see a paper trail showing the source of the funding.
Let Us Help You Qualify
It’s not unusual to be rejected the first time you apply for a home loan. Many factors are taken into consideration when approving a mortgage, but lenders don’t always tell you which ones led to denial. Loan Remedy is different. We’re here to offer an uncomplicated process and help you understand what you need to do to qualify and get the approval.