You've found your dream home. Now you have to pay for it. If you're like most homebuyers, this means taking out a mortgage. You can eliminate much of the stress of applying for your loan if you first understand the guidelines that lenders consider when determining whether to approve or deny your mortgage application.
One of the most important numbers that lenders consider when analyzing your mortgage application is your credit score. This three-digit number sums up for lenders whether you're done a good job managing your credit. Your credit score will be lower if you have a history of missing payments or making late payments. A large amount of credit card debt and past bankruptcies or foreclosures will also sink your credit score. Lenders vary, but most reserve their lowest interest rates for those borrowers with credit scores of 740 or up on the FICO scale. Those borrowers with scores below 620 will struggle to earn a mortgage loan from many conventional lenders.
Lenders also look at how your monthly debts compare to your gross monthly income. In general, lenders want your total housing payment -- which includes principal, interest and taxes -- to total no more than 28 percent of your gross monthly income, your income before taxes are taken out. They also want your total monthly debts -- everything from your mortgage payment to car-loan payments and credit card minimum monthly payments -- to equal no more than 36 percent of your gross monthly income. Lenders refer to these debt-to-income ratios as the front-end and back-end ratios.
Lenders want to make sure that you have a steady income. Because of this, they prefer working with borrowers who have worked with the same company or in the same industry for at least two years. If you have changed jobs recently or if you work on a freelance or independent-contractor basis, you can still qualify for a mortgage loan. But you will have to prove, usually by providing copies of your two to three most recent income-tax returns, that your income has remained consistent.
Lenders also look at the home you want to buy. They want to make sure that it is worth what you are paying for it. To do this, the lender will send a real estate appraiser to the home. This professional will determine the current market value of the home. Lenders want that value to equal or exceed the price you're paying.
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