Most find qualifying for a mortgage easy, though there are mortgage qualification factors that can trip some people up. It is best to understand what these factors are, so that you can take steps to rectify any potential problems in advance of your mortgage application.
In doing this, keep in mind that the mortgage business is very competitive, and lenders are not trying to defeat your application. They want to help you qualify. Here are some of the main factors involved in qualifying for a mortgage.
Debt to Income Ratio (DTI)
First, if you have a regular income and have a low level of debt you can give this a miss – or read it for interest sake. You are not certain to be offered a mortgage loan, but if your debt to income ratio (DTI) is fairly low then you have nothing to worry about in this respect.
The DTI is a common ratio that lenders use to assess your ability to repay your mortgage. Let’s say a lender is looking for a DTI of 28/36. That means that your total monthly debt repayments should not exceed 36% and that your housing costs of that monthly payment (including mortgage, homeowners insurance, property taxes, housing association fees, etc) should not exceed 28% of your monthly income.
To qualify for a mortgage, you should establish what these fees would be for your new home, and use your existing monthly debt repayments to establish whether or not you would qualify for a mortgage on that home. If not, don’t despair, because you might be able to do a deal with your lender. Otherwise, look for a home with a lower monthly overhead cost. This could simply involve less insurance or association fees. However, you may have to find a less expensive property to reduce your mortgage payment.
Credit Record and Score – FICO Score
Your credit score, also known as your FICO score, is calculated from factors recorded in your credit record. All aspects of your credit history are available from the credit records held by Experian, Equifax and TransUnion. These range from credit searches and the amount of credit you hold to your repayment history and defaults or late payments. If you have never defaulted on payments to credit cards, store cards, auto loans or any other type of credit, and the amount of credit you hold is not particularly high, then your score should be satisfactory.
Given that your DTI indicates that you have the ability to pay, you must also show that you will pay. That is where your credit record and your FICO credit score become relevant in qualifying for a mortgage . Different lenders may apply their own criteria to this, and while one may refuse a borderline application another might accept it. Qualification and approval are not the same.
Your down payment will also be taken into account. While FHA insured loans can be offered with a 3% down payment, standard loans offered by Fannie Mae and Freddie Mac can require a down payment of 5%, with up to 10% charged for higher priced homes – over $417,000. This can increase to 20% for more expensive real estate.
You will normally be requested for a minimum down payment as part of your mortgage qualification, though you can pay more if you can afford it. The stated requirement is a minimum.
Qualifying For a Mortgage: Closing Fees
Make sure you understand what the closing fees are likely to be. This may not be part of the mortgage qualification process, but you will be expected to make a potentially sizable cash payment. Do not overstretch your finances with the down payment because you will not be given ownership until the closing fees have been paid.
Qualifying for a mortgage involves meeting the criteria outlined above. There are other factors involved in the mortgage qualification procedure, but if you conform to the above requirements you should qualify for the mortgage you want. If not, find out where you are failing and take the necessary action.