According to a 2022 survey, 78% of buyers utilized a mortgage to finance their house purchase, with 28% reporting being denied financing at least once before being granted. Qualifying for a mortgage can be difficult, so it's critical to do some preliminary planning to ensure a smooth closing process.

Get Ready To Get A Mortgage

To maximize your chances of successfully qualifying for a mortgage, take some preliminary actions to get your finances in order. Here are some recommendations to help you prepare for the mortgage qualification procedure.

Check Your Credit Score

All home loans require a minimum credit score to qualify. Take the time to verify your credit score before beginning the qualification procedure to avoid surprises. It won't lower your score to check your credit.

If your score is lower than you thought, there are various ways to increase it, such as paying off credit card debt and increasing your credit limit. A credit counselor can also evaluate your credit with you and help you find strategies to improve it. Most localities also offer non-profit credit services. Avoid any firms that charge a fee to "make bad credit go away," or make similar promises.

Review Your Credit Report

In addition to monitoring your credit score, you should analyze your whole credit history. Once every 12 months, you are entitled to a free credit report from each of the three main credit bureaus.

Visit annualcreditreport.com to view your credit report. Pay particular attention to errors in your report, such as missed payments made on time or inaccurate account information. Credit reporting inaccuracies are widespread and can be rectified by submitting a request to each credit bureau. Because your credit report influences your credit score, it's vital to ensure it's correct before applying for a mortgage.

Calculate Your Debt-To-Income Ratio

Your lender will also compute your debt-to-income ratio (DTI) as part of the mortgage qualification process, so know yours in advance.

The DTI ratio compares your overall indebtedness to your total monthly income. This helps lenders determine how much money is available in your monthly budget to repay your loan. To determine your DTI, sum up your minimum recurring monthly debt payments (such as credit card minimum payments and vehicle loans). Next, divide the total monthly loan payment amount by your gross monthly income.

Determine What You Can Afford

It's a fantastic idea to make a budget and take a close look at your money when you're ready to apply for a mortgage. You should also prioritize down payment savings and learn about general savings tactics for other home-buying expenses.

Fulfill The Minimal Requirements For A Mortgage

Every mortgage has specific requirements that must be met. The most popular loan form is a conventional loan; other options include FHA loans, which are popular among first-time home purchasers; VA loans, which are available to veterans and military service members; and USDA loans, which are intended for rural areas. Additionally, there are special loans for investment properties and jumbo loans for homes that exceed conforming loan limitations.

Steady Income

Most lenders will consider your entire household income when determining whether to approve you for a specific loan amount to ensure that you are not taking on more debt than you can manage. This covers base compensation (either a salary or an hourly wage), commissions, bonuses, overtime pay, revenue from side jobs, self-employment income, and more. Except in cases where you're attempting to qualify for a USDA loan, there isn't an income cap necessary to be eligible for a mortgage. The only kind of mortgage that has income restrictions based on where the financed property is located is the USDA loan.

Stable Work History

It is important to lenders that you have a reliable source of income so they can pay your mortgage each month. For the majority of loan kinds, two years of employment history are required. USDA loans only need a 12-month minimum work history, although the prior two years of employment history may still be examined by lenders. Depending on the kind of military service, VA loans can require borrowers to serve for a certain number of days. You will explain any gaps in your work history for all loan kinds.

An Excellent Credit Rating

The minimal credit score needed to be eligible for a mortgage differs depending on the kind of loan and the specific lender. In general, you'll get better loan terms and a cheaper interest rate the higher your credit score is.

A credit score of 720 or over is considered desirable for purchasing a home, although buyers with a score of 670 may typically still anticipate a reasonable rate.

Low Ratio Debt-To-Income Ratio

To find out if you meet debt-to-income (DTI) requirements, your monthly gross income is compared to the entire amount of your monthly recurring debts. Every loan type has a maximum allowable DTI ratio that varies. A DTI of up to 50% may still be acceptable to qualify for a mortgage, although anything under 36% is usually regarded as favorable.

Try reducing your obligations by paying off high-interest credit cards and reducing the amount of balances you carry each month if your debt-to-income ratio is too high. Your combined debt-to-income ratio can be balanced by adding a co-signer with modest debt.

Save For A Down Payment

You might be able to contribute as little as 0% to 3% of the home's buying price, depending on the lending program. The median mortgage buyer contributed between 10 and 19% of the total purchase price, with somewhat more than half (58%) of mortgage purchasers reporting contributing less than 20%. The majority of mortgage applicants (63%) save money for a down payment over time.

VA and USDA are examples of government-backed programs that do not demand a down payment, while other loan types, such as second-home mortgages, have greater minimum requirements.

Gather Required Documentation

After deciding on the kind of loan you want to take out, you must collect the necessary paperwork. When navigating this to-do list, your loan officer or lender might be a useful resource.

Proof Of Income

You will need to present documentation of a reliable source of income. Pay stubs from the previous two months as well as two years' worth of IRS W-2 forms are often included. For military income and benefits, Leave and Earnings Statements (LES) are acceptable forms of documentation. Additional paperwork, such as tax reports and profit and loss statements, is needed for self-employed people.

Verification Of Employment

To confirm your employment, your lender will get in touch with your company directly, therefore you will need to give them your name and phone number. They might also request copies of your most recent pay stubs and an employment verification letter.

Proof Of Assets

Your lender may want documentation of your assets to substantiate your ability to pay the down payment and closing expenses. Mixtures, liquids, and non-liquids are conceivable categories for assets. An asset is deemed liquid if it can be quickly turned into cash, such as checking, savings, and investment accounts. A bank statement might be used as evidence of your liquid assets.

If you receive money as a gift, you might need to show documentation proving the giver did not borrow money from you and that the money was transferred into your bank account.

The liquidation of non-liquid assets is required before they can be applied to a down payment and closing expenses. Non-liquid assets are valuables you own and can sell for fair market value, such as art, cars, real estate holdings, and 401(k) accounts. Typically, a bill of sale and other supporting documentation are needed to convince lenders that you were paid. Liquidating before applying for a mortgage makes the qualification process considerably simpler, even though you can do it during the underwriting process.

Individual Identity

You will be asked to present government-issued identification, such as a passport or driver's license, to verify that you are who you say you are. You can verify your name and birthday with a social security card and another type of ID if you don't have these forms of identification.

Consult A Lender

You should choose a lender that best suits your needs in terms of affordability, such as one that provides low interest rates, manageable monthly payments, and loan choices that are advantageous to you as the buyer.

You should also think about how comfortable you are and how much assistance each lender provides. For example, if you're a first-time home buyer, you might find it helpful to have a lender who takes you step-by-step through the mortgage application process. These are a few of the methods you will interact with lenders.

Get Pre-Qualified

For the mortgage process, a pre-qualification or pre-approval is a helpful place to start. When you're ready to make an offer, you can get pre-approved after becoming pre-qualified as soon as you start your property search.

When you are pre-approved, you can compare rates, terms, and lender fees before choosing a particular lender or loan arrangement. If you're just beginning to consider getting a mortgage, the quickest and most straightforward method to find out how much you might be able to borrow is to get pre-qualified.

Put In A Mortgage Application

To properly begin the qualification procedure, you must submit a loan application. Usually, you can complete this online, and your lender can assist you in making sure you do it right. You can compare your options by applying for a mortgage with multiple lenders before deciding which one to work with.

Complete The Application For A Loan

You must complete the necessary loan application documentation with your selected lender to obtain a mortgage. You'll need a purchase contract and the property's address to accomplish this. Stated differently, you will finish this phase once you have negotiated a price with a seller and found a property.

FAQs About Mortgage

You might have more questions about mortgages, and we're more than happy to help you with that. Comment your questions below or send us a message. For now, we have gathered the most often-asked queries regarding mortgage qualification.

Am I Eligible To Get A Mortgage?

You can be eligible for a mortgage as long as you fulfill the minimal requirements for the loan program and lender of your choice. Minimum credit score, maximum debt-to-income ratio, minimum down payment, income restrictions, and work history verification are a few examples of requirements.

How Do I Become Eligible For A Home Loan?

The requirements are different from one lender to another, but in general, you'll need a stable job history, decent credit, a low debt-to-income ratio, and funds for a down payment.

How Do I Know If I'm Qualified To Get A Mortgage?

Not sure if you can get a mortgage or not? One of the best things to do is to do a pre-qualification with a loan provider. There's no commitment or obligation when you want to pre-qualify; your credit score will not be affected as well. It can be a useful tool to estimate the maximum amount you could borrow. Not comfortable talking to a lender just yet? Calculate your approximate monthly mortgage payments.