Mortgage Qualification Factor #1: Know Your Credit Score. Beef it up.
This is the single biggest mortgage qualification out there. Why? Because it’s proof that you can pay back what you owe. Your credit score is the combination of all of your loans, credit cards, and your payment histories, and if you haven’t got all your ducks in a row, there are all kinds of tools out there to get everything you need when you want to improve your credit but the basic goal is to make sure you’re making payments on time, and that no bill collector is trying to collect on things you owe.
Credit is complicated. The first thing to do to get bad credit back on track is to check your credit report (through one of the main credit companies: Equifax, Experian, TransUnion) and get everything you owe paid up-to-date. It can take a while for your credit to clear out, so the goal is to be vigilant. The best way to raise your scores is by establishing your credit history through a single lender with a small debt while building savings and assets. Another huge factor for your credit is your current income.
With a high enough credit score, you can secure interest rates on your mortgage MUCH lower than someone with poor credit.
Mortgage Qualification Factor #2: Loan-to-Value Ratio
It wouldn’t make any sense to put a huge chunk of money down on something that was never going to bring a good value. Imagine if your friend had a bike that sold at the local supermarket for $125, but they needed to borrow that amount from you to purchase the bike. You don’t know if they’re ever going to be able to completely pay you back, but you can take their bike if they don’t pay you- the catch is, you can only expect to sell it for 75 percent of what you spent for it. This means that you’d automatically take 40 dollar loss if your friend doesn’t pay you back.
If this friend was a good friend, you might invest the money in them to get a nice shiny bike- but most mortgage lenders aren’t there to be your friend, they’re there to make money. This is why mortgage lenders use a ratio called the Loan to Value Ratio to establish a person’s credit. Obviously, this isn’t the only factor that a mortgage lender is going to use, but larger loans are seen as a larger risk (this can be said of smaller loans too) and therefore bring higher interest and payments.
If the house you really want is going to require you to take a mortgage over 75% you should probably consider another house.
Mortgage Qualification Factor #3: Debt-to-Income Ratio
America is all about working and proving your livelihood to improve your lot in life. Plus, you have to expect to grow and expand if you want to raise a family, be successful and expand your life. If you haven’t got these expectations for yourself, don’t worry! The bank does.
Typically speaking, when you’re looking to get a mortgage, you should have a debt to income ratio around 43% or lower. What debt to income ratios show lenders is how you are personally able to manage your payments on the money you’ve borrowed in comparison to your finances that you earn. A rough example of this is to assume you’re paying $1,000 a month on your mortgage, $200 on your shiny new car, and another $800 for all of your other payments and debts (school loans, utilities, phone bills, cable/internet services). Take the sum total ($2,000) and divide it by .4. You make this amount (in our example it’s roughly $5,000 a month) for a bank to give you the best deal on your mortgage. If you don’t, the bank might still give you your mortgage, but it won’t be a qualified mortgage.
Cut out your extra debts or make a larger amount to get the bank on your side when you’re looking to get the best mortgage out there.
Mortgage Qualification Factor #4: Housing Cost-to-Income Ratio
You don’t buy a car without expecting to change a few parts, why would you do any differently with your home? Lenders see houses as huge investments. They assume your goal is to make an investment that makes you money- and this requires you to take all the necessary steps- paying your mortgage principal, your interest payments, property taxes, hazard insurances, mortgage insurances, and fees- if it exceeds over 28% of your income, you’ll probably have to find something more affordable.
Banks or lenders might still lend you money, even if your front ratios are too high. These types of negotiations typically require co-borrowers to lower initial payments, but if you have a mortgage that’s too high and you can only afford to pay the bare minimum because of your debts and housing costs aren’t low enough compared to your salary, you’re going to find yourself swimming in a debt that just keeps getting bigger and bigger.
You might forget about your bills and expenses, but banks don’t. If you aren’t making enough so that your salary is higher than projected housing costs, you might have to look into something more affordable.
Mortgage Qualification Factor #5: Down-payment Amount
A down payment is your ace in the hole. The more cash you can put down, the lower your payments are going to be, which plays a huge factor in deciding your other ratios. A good rule of thumb is to try and put a sizable chunk into the amount you’re trying to borrow. It helps to consider the principal of your loan, and the amount of time that you plan on taking to pay it back, plus sometimes lenders will give you additional incentives when you put money down in the form of rebates, that can definitely add up over the long run.
The best thing to do is to try to put down 20% on your initial mortgage. This means if you’re trying to borrow $100,000, you should aim to put at least $20,000 in. Not only will you get lower interest rates, your payments will be drastically smaller. If you can’t pay 20%, experiment to see how lower amounts of down-payments can affect your costs.