It's disappointing to find the home of your dreams, make an offer, then be turned down by your lender because you don't qualify for a mortgage. You can save yourself some heartache as well as avoid wasted time if you determine whether you qualify for a home loan before you start looking. Different types of mortgages are available and the conditions of each one vary, but there are some basic requirements no matter what type of loan you get. These focus on your income, your debt and your credit score.
Credit Report Review
Order your credit report. You can do this through your local credit bureau; you also can order a free credit report once at year at www.annualcreditreport.com.
Review the items listed on your report. Sometimes debt is reported incorrectly; it may be that some of the debt listed is not yours, maybe the creditors are reporting that you consistently pay late when you really pay on time or a lien or judgment that has been satisfied might still be showing a balance. Work with the credit bureau to correct any inaccurate reporting.
Find your credit scores on the report. There should be three of them, one from each of the national credit reporting bureaus. Your middle or lowest score will be used to qualify you for a mortgage loan. Lenders like to see scores over 700, but require a minimum score of 600 and some may only allow a credit score of 620.
Income, Debt, Assets
Check a recent pay stub to confirm your gross monthly income -- your income before taxes.
Tabulate your recurring monthly debt. Such debt includes car loans, student loans, credit cards and other unsecured debt. Include child support, alimony, medical bills and any other obligations with a balance upon which you make monthly payments.
Divide the amount of your debt by your gross monthly income. For example, if your monthly debt is $500 and your income is $2800, your debt to income ratio will be 18 percent. The lower this percentage, the better your chances of qualifying for a mortgage, as lenders want to see that your total debt to income -- including your mortgage payment -- is no more than 36 percent.
Review your most recent checking, savings, investment and retirement fund statements to get an idea of how much money you have access to for a down payment. Depending on the type of loan you get, you'll need to pay 3 to 20 percent of the sales price in cash as a down payment; these funds cannot be borrowed.
If your credit score is lower than 600, repair your credit and bring the number up. Pay off as much debt as you can afford, while keeping enough money to live on. Bring past-due payments current.
If your debt to income ratio is 36 percent or higher even without a mortgage payment, pay off some bills to qualify for a loan.
Start setting money aside each month for a down payment. You also can ask a relative, such as a parent or grandparent, for a monetary gift to use as a down payment; be aware that the mortgage lender will require a letter from the giver stating that the money is a true gift and no repayment is expected.
- Realtor.com: How to Qualify for a Mortgage
- Mortgages and Refinancing: Get the Best Rates; Jason R. Rich
- U.S. Department of Housing and Urban Development: Homebuying
- Realtor.com: Can You Afford to Buy a House?
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