5 Things You Need To Qualify for a Home Loan

To qualify for a home loan, you need to meet some financial criteria. Before a bank will loan you money to buy a home, they want to make sure that you can afford the mortgage payments and that you have a solid history of paying your other bills on time.

To show your lender that you’re ready to take on a home loan, you’ll need these five things.

Your credit score shows how responsibly you have managed debt in the past. The higher your score, the more “credit-worthy” you seem to lenders.

Your FICO credit score is based on five factors, some more important than others:

1. Payment history (35% of your score). Have you made payments on time and in full?
   
   
2. Amounts owed (30%). Are you borrowing less than the maximum allowed? With credit cards, for example, you should try to keep the balance under 30% of the credit limit.
   
   
3. Length of credit history (15%). How long have your accounts been open?
   
   
4. New credit (10%). Have you recently applied for new accounts? Opening too many accounts at once is a red flag for lenders.
   
   
5. Credit mix (10%). Some debts (like student loans) are viewed more favorably than other debts (like credit cards).

Most lenders expect to see a credit score of at least 620 from home loan applicants. But it is possible to get a loan if your credit is slightly lower as well. If you’re not quite there yet, consider a few ways to boost your credit score.

 

To confirm that you make enough money to afford the mortgage payment, lenders need to see proof of your income. The most common documentation for this purpose includes:

• Pay stubs,
  
  
• Bank statements, and
  
  
• Tax returns.

You might need a combination of the above to give a complete picture of your income. For example, if you’re self-employed, you won’t have pay stubs, but your bank statements will show the recent credits to your account, and your tax returns will show your annual income.

DTI stands for debt-to-income ratio. This number tells a lender how much of your income is already allocated to pay other debts. To calculate your DTI, simply divide your total monthly debt payments by your total monthly income. Requirements vary by lender, but most likely to see a DTI below 36-40%.

Most buyers will need a down payment. This is the amount of the purchase price that you’re paying out of your savings. The required down payment depends on your loan type. Conventional loans, for example, require at least 3% down, while FHA loans require at least 3.5% down. Having said that, it is also possible to get loans with no money down!

Whatever loan type you choose, you will need to pay closing costs. These costs cover things like loan origination fees, appraisals, and document processing fees. Closing costs vary greatly, but buyers should generally budget 3-6% of the purchase price for closing costs.

By the way, it is possible to get financial assistance with closing costs. Under the right market conditions, the seller might even be willing to cover some of these costs for you. A good buyer’s agent can help you understand your options.

Part of being a homeowner is taking financial responsibility for the maintenance and care of the property. If the water heater needs replaced or the roof needs to be repaired, you’ll need to have funds on hand to cover this type of expense.

Maintenance costs are inevitable. So lenders like to see that you have funds sitting in reserve. Many homeowners keep a savings account specifically for home maintenance expenses, whether these are planned expenses (like annual HVAC servicing) or unexpected expenses (like when the A/C suddenly breaks down).

Our team of well-qualified real estate agents proudly services the Greater Bay Area. But we also have a nationwide network of reputable agents, ready to assist buyers in other parts of the country. If you’re looking to buy a home, you can simply contact us to be connected with an agent who can help you find your new home.

We’re excited to help you on your journey to homeownership!