In order for most of us to buy a house or condo, we have to get a loan approved by a mortgage lender. But there are several requirements that you must meet in order to get approved for a mortgage loan. Learning more about these requirements before you start the home buying process can greatly help your chances of approval and make this stressful process go much smoother.
1. Proof of Steady Income
Every mortgage lender will require you to prove you have a steady income, so you’ll have to provide pay stubs showing your take home pay and the lender will confirm your employment with your employer. Generally, lenders require you to have the same employer for 1-2 years to ensure that you are able to keep a job. If you are self-employed, you will have to provide W-2s for the past 1-2 years. It can be more difficult to get approved for a mortgage if you are self-employed but it is certainly possible, you just need to have patience with the approval process. Remember mortgage lenders are trying to ensure that you will be able to make your payments, otherwise they will not approve you for a mortgage. Having these documents available when you are applying for a mortgage will save you some time.
2. Low Debt-to-income Ratio
Lenders will calculate your debt-to-income ratio, or DTI, to help them assess how likely you are to pay back your loan. Your DTI is the ratio of your total monthly debts to your monthly pre-tax income. Lenders will calculate this based on if you were currently paying off a mortgage, so your debts will not only include car payments, credit card payments and payments for personal or education loans, but it will also include your mortgage payment, home insurance, taxes and potentially private mortgage insurance. Different lenders have various limits on DTI ratios and some can be flexible depending on other factors, like your credit score or down payment. Read more about how to calculate your debt-to-income ratio and how you can use it to determine how much house you can afford.
3. Good Credit Score
There are a few different types of mortgages so your minimum credit score to get approved depends on the type of mortgage you’re applying for. The minimum credit score to be approved for a conventional mortgage is about 620-640. This can also range depending on other factors, such as your down payment. You can qualify for a Federal Housing Administration loan if you have a credit score of 580 with a 3.5% down payment or 500 with a 10% down payment. Veterans Affairs loans and United States Department of Agriculture loans have additional requirements that you must meet, but they generally require a credit score of about 600-640. Before you contact mortgage lenders you should check all 3 of your credit reports and dispute any discrepancies. You don’t want to be turned down for a mortgage because of a mistake on your credit report that you could have disputed and removed. Learn how to get your free annual credit reports or if you have already checked each one thoroughly then take some time to improve your credit score by learning more about the factors that determine your credit score.
4. Down Payment
Your down payment is a very important factor in getting approved for a mortgage. Depending on the amount you put down, the lender might be able to provide some flexibility when it comes to other requirements. Your down payment percentage is calculated based on the amount of the down payment divided by the purchase price of the property. For instance if you put down $10,000 on a $250,000 house, your down payment is 10,000/250,000 = 0.04 = 4%. However if you put down less than 20% of the purchase price for a conventional mortgage, you'll have to pay for private mortgage insurance. Learn more about private mortgage insurance and how to avoid paying for it.
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