Minimum Mortgage Qualification Requirements | How Much Can You Borrow?

Do you currently rent an apartment or house but dream of having your own place to call home? The first thing you’ll need to do is apply for a mortgage. Easy enough, but how do you know if you’ll actually qualify? 

We’ll show you what lenders look for when considering mortgage applications and how you can make yours stronger. When you know what to focus on when filling out your application, you stand a better chance of getting approved.

How to Qualify for a Mortgage

Let’s start by discussing the key factors that lenders look at on mortgage applications. These factors are what they use to determine whether you qualify. 

Income

Obviously, lenders want to know whether you make enough to cover your mortgage payment each month. But that’s not all, as you also need to bring in enough income to pay for all of your other obligations and commitments. 

Please keep in mind that there isn’t a magic number when it comes to considering your income. You just need to make enough to where you can meet your financial responsibilities, mortgage included. Fortunately, lenders look at other types of reliable income other than just your employment paychecks.

Acceptable forms of incomes include:

  • Income from investment accounts
  • Social Security payments
  • Child support payments
  • Any extra side income
  • Military allowances
  • Alimony payments
  • Military benefits 
  • Commissions
  • Overtime

Lenders just need to know that you have consistent income. It’s important to note that lenders usually don’t consider income that isn’t scheduled to come in for at least two more years. A good example of this is if you have an alimony that cuts off in three months.

Property

Your getting a loan is often dependent on the type of property you plan on buying. A primary residence property is the easiest to secure, which is one that you plan on residing in for most of the year. This is because primary residences are the least risky for lenders. And as such, they can extend loans to far more people. 

One of the main reasons primary residences are favored and supported by lenders is because most borrowers will do whatever it takes to secure their homes. If there’s an unexpected loss of income, such as from losing a job, borrowers will almost always make sure that they have a roof over their heads.

This fact provides security to the lenders, which in turn bodes well for you getting a loan. What’s more, many government-backed loans can only be secured for primary residences because of this reasoning. 

If you plan to buy a secondary residence or investment property, you’re going to need to meet stricter requirements to qualify for a loan, such as a larger down payment and a higher credit score. These types of properties are deemed risky for lenders solely because borrowers are less likely to prioritize payments to keep them current.

Lenders correctly assume that borrowers are more likely to secure their primary residences over investment or secondary properties.

Assets

Your personal assets are equally important to lenders. This is because they need to know that if you get into financial difficulties, you have something to fall back on to help you raise money for your mortgage payments.

Therefore, your assets must be items of value, such as:

  • Certificates of Deposit (CDs)
  • Other retirement accounts
  • Checking account
  • Savings account
  • Mutual funds
  • 401(k)
  • Stocks
  • Bonds
  • IRA

You will likely need to provide your lender with documentation that proves you have any of the above assets. As such, it’s a good idea to go ahead and gather up whatever information you have so you’ll be prepared to present any requested documents. 

Credit Score

When you have a higher credit score, it’s usually an indicator that you pay your bills on time, are careful with your spending, and don’t have a lot of debt. Conversely, a low credit score is often a sign that you’re late on payments, buy more than you can actually afford, and are irresponsible with your spending. 

With a good credit score, lenders are more likely to loan a greater amount of money. What’s more, you can expect to get lower interest rates, as well. Most loans require that you have a FICO score of at least 620 to qualify. 

If your credit score is below 620, you might want to consider getting an FHA loan. This is a government-backed loan that requires lower standards than other loan types. You therefore don’t necessarily need to have the same high level of income and credit to get an FHA loan.

In some cases, you can get an FHA loan with a credit score as low as 500. However, you will need to be able to provide a sizable down payment at closing, typically 10% of the purchase price.

Debt-to-Income Ratio

It isn’t always easy determining whether your income provides enough money to cover all of your expenses. That’s why lenders like to look at your debt-to-income ratio. This figure tells lenders what percentage of your income is needed to cover your bills each month.

To calculate your debt-to-income ratio, you will first need to add up all of your fixed payments. If you have expenses that vary from month to month, don’t include them. You’re looking for things like rent and car payments – bills that stay the same.

If there’s recurring debt that you are responsible for, that is, debt you can’t avoid paying every month, only include the minimum amount you have to pay. So if you owe $10,000 in credit card debt but are only required to pay $100 a month, include only the $100 in your calculations. 

Expenses that aren’t a necessity or are subject to change need not be included. When you have added up your total, divide it by your household income (pre-tax). Then, multiply that figure by 100 to see what your debt-to-income ratio is.

Borrowers with a lower number are more likely to get the loan they need. A general rule of thumb is that you need a debt-to-ratio of at least 50% to be considered for a loan.

How to Improve Your Chances of Getting Approved

One of the best things you can do to ensure that you get the loan you need is to improve your credit score. To effectively do this, work on making all of your payments on time. In fact, one of the easiest ways to raise your credit score is to establish a history of timely payments.

You should also keep a close eye on how much money you spend with credit cards. Lenders consider candidates risky who consistently rely on credit cards. To lower your credit score, don’t use more than 30% of your available credit every month. 

Finally, work hard to pay down any debt that you currently have. Paying on your debt shows lenders that you are responsible for it and can manage your finances. The sooner you can start tackling your debt, the higher your credit score is likely to be.

Determining How Much You Can Borrow

Once you know the necessary steps to apply for a mortgage, you can start figuring out how much you can afford. To make this easier, use a mortgage calculator. There are many free online mortgage calculators that you can take advantage of to help you learn what you’re capable of paying each month. 

To use a mortgage calculator, you will need to plug in the value of the home, how much you’re putting down, the type of mortgage, and the interest rate. 

When you get the figure from the mortgage calculator, you will be able to tell whether a new home fits into your budget. From there, you can make adjustments to your budget plan if needed. 

Summary

Securing a mortgage loan is a lot easier when you have a good history of managing your finances. If a mortgage calculator shows that you aren’t in a position to make the required monthly payments, start working on resolving the areas of your financial standing that need immediate attention. 

It may take some time and a commitment to improving, but doing so will ensure that you can comfortably afford a home later. Don’t get discouraged if you can’t afford a home right away. Use this opportunity to better yourself so that you will be able to buy a home in confidence when the day comes.

For helpful tips and guidance on how you can improve your financial standing, be sure to explore our extensive articles catalog. There, you will find a wealth of beneficial blogs that detail how you can increase your credit score, secure a loan, start a business, and much more.

As always, if you have any questions that our financial experts can help you with, please feel free to contact us any time.

 

Sources

https://www.fico.com/en/products/fico-score

https://www.hud.gov/buying/loans

https://www.daveramsey.com/mortgage-calculator

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