If you’ve never bought a home before or it has been many years since your last mortgage transaction, you may want to freshen up on the basics before you head to the bank. To get you started, we’re going to go over three of the main things lenders look for when reviewing your mortgage application.
This one is a biggie. You’ll likely need to have cash to buy a house, plain and simple. While this is an essential, coming up with the cash you need isn’t always easy. Because of this, you may consider using a down payment gift. If this is the route you take, it’s important to remember that there are several rules you must follow and all funds must be documented and sourced.
Mortgage Tip: It’s a good idea not to focus on the percent down. If a mortgage lender asks you how much cash you have to work with, you probably don’t want to name a percentage, which is a function of the purchase price. Instead of saying you can pay 10%, you could provide the total dollar amount. This way, you can let your lender worry about the percentages — i.e. what your down payment looks like in relationship to how much house you hope to buy.
You must have an income to get most types of mortgages (excluding reverse mortgages). Mortgages are calculated based on your income, not on the house. The only way to show your ability to repay the home loan is to prove that you have enough money coming in.
Some lenders have asset-depletion programs, which allow you to generate income off an asset. This typically means having large assets in the bank to draw a proposed income from, which is then used to qualify for home financing. However, this is not the route most people take. Generally speaking, you’ll need to have income to offset the mortgage payment and to keep your debts relatively low in relationship to your income, which creates room for your mortgage payment.
Your credit score plays a major role in securing a mortgage. In most cases, if you have a credit score anywhere in the 620 or higher range, you’re in business. In some cases, you can get a mortgage if your credit score is under 620, with stronger credit requirements such as a 43% maximum debt-to-income ratio.
Securing Your Mortgage
If you only have one or two of these things, the odds of getting a mortgage will be harder, as each helps to prove that you really can afford to repay the mortgage. If you have income but don’t have credit, no amount of cash will fix that. If you have cash but don’t have credit, that will not fix the need for income. All three components must be in alignment in order to qualify for mortgage-loan financing.
Lenders will closely examine for your full income, cash and credit. After all, it’s how they determine how much mortgage and/or home you are eligible for. If you are deficient in an area, focus on fixing that obstacle. Getting approved for financing will soon be in reach.
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