Let's start by looking at the main factors that lenders first consider when deciding if you qualify for a mortgage or not. Your income, debts, credit rating, assets and type of property play an important role in getting approved for a mortgage. One of the first things lenders consider when considering your loan application is your household income. There is no minimum dollar amount you must earn to buy a home.
However, your lender needs to know that you have enough money to cover your mortgage payment as well as your other bills. Lenders need to know that their revenues are consistent. They generally won't consider an income stream unless it's expected to continue for at least 2 more years. For example, if your incoming child support payments will run out in 6 months, your lender probably won't consider them as income.
Primary homes are less risky for lenders and allow them to extend loans to more people. For example, what happens if you lose an income stream or have an unexpected bill? You're more likely to prioritize your home payments. Certain types of government-backed loans are valid only for primary home purchases. Let's say you want to buy a secondary property instead.
You'll need to meet higher standards of credit, down payment, and debt, as these types of properties are riskier for financing from lenders. This is also true for buying investment properties. Your lender may request documentation that verifies these types of assets, such as bank statements. Your credit rating is a three-digit numerical rating that indicates how reliable you are as a borrower.
A high credit score usually means that you pay your bills on time, don't get too much into debt, and take care of your spending. A low credit score can mean that you often fall behind on payments or that you have a habit of borrowing more than you can afford. Homebuyers with high credit scores have access to the widest selection of loan types and the lowest interest rates. Mortgage lenders need to know that you have enough money to cover all your bills.
This can be difficult to calculate based on your income alone, so most lenders place greater importance on your debt-to-income ratio (DTI). Your DTI ratio is a percentage that tells lenders how much of your gross monthly income goes toward mandatory bills each month. Then, divide your total monthly expenses by your total family income before taxes. Include all regular and reliable revenues in your calculation from all sources.
Multiply the number you get by 100 to get your DTI ratio. Your credit score significantly affects your ability to get a mortgage loan. Take some steps to repair your credit so you can qualify for more types of loans and get lower interest rates. Here are three simple ways to start the path to better credit.
Qualifying for a mortgage involves a lot of pieces coming together. However, once you have your finances in order and have the necessary documents ready, you'll be one step closer to becoming a homeowner. While the exact forms may vary, Todd Huettner, owner of Huettner Capital, a residential and commercial real estate lender, says that a lender can get a good idea of your chances of being approved by looking at your recent paystubs, bank statements, W-2 forms and tax returns. Mortgage lenders want to know the full story of your financial situation.
You'll probably need to sign Form 4506-T, which allows the lender to request a copy of your tax returns from the IRS. Lenders generally want to see tax returns for one or two years. This is to ensure that your annual income is consistent with the profits reported through pay stubs and that there are no large fluctuations from year to year. Lenders may ask you to see your payment receipts for the last month, more or less.
Their tax returns help them get a clear picture of their overall financial health, while pay stubs help them assess their current income. If you are self-employed or have other sources of income (such as child support), you may need to show your lender proof using 1099 forms, direct deposits, or other means. When evaluating your risk profile, lenders may want to review your bank statements and other assets. This can include your investment assets, as well as your insurance, such as life insurance.
For buyers who aren't yet homeowners, many lenders will ask for proof that you can repay on time. You may be asked for rent checks that have been canceled for one year (check that the landlord has cashed). Or, they might ask the landlord to provide documentation showing that you paid your rent on time. Your rental history is especially important if you don't have extensive credit history.
So far, we've looked at mortgage rating factors that are based on the buyer's financial history. Lenders often use their DTI index along with their housing expense index to better determine their mortgage rating. .