Tips for Qualifying for a Mortgage

Before you even start thinking about qualifying for a mortgage with your financial institution, you need to decide how much debt you can afford. The best way to figure out how much house you can afford is by basing your decision on your monthly income. After all, you're going to pay your mortgage monthly. Since you pay your bills monthly, it pays to know how much per month you can actually afford.

This article discusses the financial path to homeownership by evaluating:

• Your debt-to-income ratio (DTI) and the price range you can afford

• The best mortgage options available for your dream home

• Good credit for mortgage preapproval

How Much House Can You Really Afford?

The traditional rule has been to spend roughly one-third of your monthly income on a mortgage payment. Some individuals and lenders will go as high as 45%, but more conservative institutions and individuals want it to be around 25% of your income. A loan officer will ask for your tax returns, bank statements, and paystubs. They’ll send these documents to their underwriting department for risk analysis. If your income is too low relative to the home price and amount you’re borrowing for a home purchase, they might deny your mortgage application.

Suppose your monthly income is $3,000, and you’d like to get a mortgage. Ideally, you would be paying somewhere between $750 (25%) and $1,350 (45%). Most financial institutions now have online mortgage and loan calculators. Use these resources to learn about their requirements before qualifying for a mortgage. Also, keep in mind that you may have to save money for additional expenses, including:

• Upfront closing costs

• Homeowners insurance

• Property taxes

• Private mortgage insurance (PMI)

When borrowing for a new home, seriously consider the possibility of being laid off or hit with a serious financial issue so you don't over-extend yourself. Don't let other people pressure you. Only stick with a loan that you feel comfortable with. Finally, qualifying for a mortgage and affording monthly payments still doesn’t help with saving for a big lump sum down payment. So, you should research ways to save up for a down payment.

Boost Your Income and Savings & Alternate Options

You may have a modest income. Perhaps your savings could use a boost. Raising income isn’t always easy, but it’s a way to improve your home loan qualification chances. Mortgage lenders want borrowers who have the means to pay back money reliably. Cutting up your credit cards and luxury spending might go a long way toward affordability.

Some lenders also offer first-time homebuyer assistance. Some types of mortgages are backed by the government for qualifying homeowners. The loan terms are more flexible to help borrowers purchase a first home. You can learn more about your eligibility for these types of loans with the following resources:

• Federal Housing Administration - FHA loans

• United States Department of Agriculture - USDA loans

• Department of Veteran's Affairs - VA loans

Know and Improve Your Credit Report

When qualifying for a mortgage, the first thing the financial institution providing your loan will check is your credit score (FICO score). They check from the big three credit bureaus: Equifax, Experian, and TransUnion. The higher your score, the more likely you are to get a loan, and the lower your interest rates will be.

This is because your score is supposed to correlate with your credit risk: higher scores translate to less risky loans for banks. The bank can offer better terms for the loan when you have a high credit score since your history supports the idea that you are good for the loan money. A small credit union might offer even more competitive rates. But, like big banks, they’ll also want to make sure you have a good credit score.

The primary factors behind your credit score are your outstanding debt and your history of payments. For example, if you defaulted on your student loans, you may have an adverse mark on your credit history. If you have a large amount of outstanding debt and have a history of paying late, expect a lower credit score. Check your score and clear up any errors before you file for a loan—not after.

How Mortgage Loan Preapproval Helps Your House Search

Once you've established the kind of loan you'll need and gauged your personal financial landscape, your lender can provide you with a prequalification letter for a loan. This is a letter saying that, based on the information you've provided, it’s likely that you will be approved for a loan of a certain amount. Note that this letter is not a guarantee. It helps provide you with a specific loan amount that you can use to begin shopping around.

A pre-approved loan is the next step beyond prequalification. It’s a step closer to a guaranteed loan. It means that your lender has checked your credit, evaluated your financial situation, and decided that you can most likely take a loan for a specific amount. Note, however, that although a preapproved loan means you can get a loan, it's not an absolute guarantee that the loan will be granted. Most institutions require an appraisal of the property, a title report, and a purchase contract before the preapproved loan will actually be completed.

A Real Estate Lawyer Can Help With Mortgage Questions

Trying to buy a house is complex, stressful, and personal. Get all the guidance you can to help make the process easier and best for your unique financial situation. Your real estate agent or realtor may be able to give you tips about mortgage rates and fixed-rate options. But they’re not an expert when it comes to legal issues. A real estate lawyer can help clarify and secure the mortgage loan and home-buying process.