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How Lenders Qualify You
Qualifying for a mortgage has become simpler over the years with the addition of credit scoring and automated underwriting. Today, many lenders do not rely on an underwriter’s opinion of how they “feel” about your file. Rather, it boils down to facts that a computer has analyzed regarding your ability to repay this debt. Although there are still times when an underwriter’s knowledgeable judgment is needed to approve a loan.
In 2008, the mortgage industry went through a significant change regarding the requirements to qualify for a mortgage. Rather than borrowers telling lenders what their income was and if they had good credit, borrowers now have to prove their income and credit history. Lenders are now looking at the following criterion when underwriting a loan:
Stability of income
A lender needs to verify the amount and duration of your current income. Typically, this means a 2 year history of steady employment with consistent or increasing income. If you are self-employed, a lender will use your last 2 years of Federal tax returns to determine your income after adding back allowable deductions.
Credit history
Credit scores have made this portion a little easier. Currently if your credit score is at least 680, some type of financing option is available for you. If your score is over 720, all of the types of financing options are available to you. However, for a score under 680, be prepared for your loan options to be fewer with a higher interest rate and/or closing costs. You may also be required to provide a larger down payment with higher mortgage insurance premiums. Any score under 620 may be declined.
Size of down payment and amount of funds in reserve
This has become increasingly important because statistically a new homeowner is more likely to be late on one of their first 3 house payments, than any other payment. Lenders also like to see that a homeowner has a personal financial investment into the home. Homeowners then have more than a casual interest in losing their home to foreclosure.
Debt to income ratios
There are two ratios that are always calculated. One is the relation of the new house payment to your gross monthly income. The ideal range is 25 – 30% (maybe as high as 33%). The other ratio compares your new house payment plus your other current monthly debts (installment and revolving) to your gross monthly income. The target range for this ratio is 36 – 45% (possibly up to 49%). There are times, when certain installment payments will not be considered as part of this calculation. Check with one of our Home Loan Specialists to see if this rule applies to you.
If you are able to meet these requirements you will find that your lender will most likely be able to approve you for your home financing. Talk with one of our Home Loan Specialists today to discuss your specific needs and goals.
