How to Qualify for a Mortgage

The lender usually scrutinizes the financial grounds of the borrower, including their credit score and whether they will be able to pay back. In short, whether the borrower is worth the risk is checked by the lender. But what is needed to qualify such scrutiny? Here are the specific factors that lenders consider before you get mortgage approval.

Basic Income

The first factor the lender checks is the primary income of the borrower. There is no minimum amount of dollar you must earn to apply for a mortgage. However, the lender checks the financial background to estimate whether the borrower can pay back while managing other bills.

Thus, the primary and steady income is an essential criterion for most lenders. Reliable and regular sources of income are also considered; this includes military benefits, child support payments, alimony, commissions, social security payments, etc.

Down Payment

Most lenders prefer when your down payment is at least 20% price of the mortgaged house. However, some mortgages require you to pay less. However, a lesser down payment also means the lender's scrutiny would be more stringent than ever. This is because they often doubt the chances of paying back from the borrower when they cannot afford a high down payment.

If the borrower cannot pay a 20% down payment, the lender usually requires private mortgage insurance or PMI to protect against potential losses.

The Assets You Own

Besides the mortgaged property, lenders are likely to inquire about the assets you own to ensure if the borrower can pay the premiums even during a financial crisis. This is because assets refer to things of value that you own, which can aid in paying the premiums even during a financial crunch. 

Savings and checking accounts, IRAs or any retirement accounts, mutual funds, stocks, bonds, and certificates of deposit all qualify as assets.

Debt Ratios

The debt-to-income ratio is also considered before a borrower qualifies for a mortgage. Debt ratios can be of two types. 

The first type is the housing ratio or front-end ratio. It refers to monthly payments along with other costs incurred from ownership. Next, the total amount is divided by gross monthly income to determine your housing expenses.

The other type is the back-end ratio, where all the ongoing monthly installments of debt, premiums, credit cards are considered together with house expenses. This must be divided by gross income too. To qualify for a mortgage, the ratio should not be more than 28% of your gross income from the front-end and 30% from the back end.

However, the guideline varies based on the gross income. For example, someone with a high gross monthly income can even have 40%-50% ratios.

Credit Score

A credit score is a three-digit number that gives the lender an idea about your reliability as a borrower. When the credit score is high, it indicates that you pay off the bills in time. Conversely, a lower credit score means you have more debt than you can afford and will possibly fall short while paying back.

To qualify for a mortgage, your FICO credit score must be above 620. The only loan you can be eligible for with anything less than this, but more than 580, is the FHA loan.

The mortgage is all about calculated risk both for the lender and borrower. However, having a better understanding of the eligibility criteria helps one improve their chances of getting their appeal for a mortgage approved.