You Ask, We Answer: How Can I Qualify for a Home Loan?
Your credit score is a numerical rating that denotes how reliable you are as a borrower. This three digit number can indicate if you pay your bills on time, if you take on too much debt or if you currently have more debt than you can afford. The higher the three digit number, the better your score. Other than giving your lender a picture of the type of borrower you are, your credit score will allow you access to better (lower) interest rates and the most diverse selection of mortgage loans.
Homebuyers will generally need a credit score of 620 (a “Fair” score) to qualify for most mortgages. If your score is below 620, you may want to consider an FHA loan, which is a government-backed loan with lower debt, income and credit requirements.
According to Rocket Mortgage, calculating your debt-to-income ratio (DTI) is easier than it sounds. “Begin by adding up all of your fixed payments you make each month. Only include expenses that don’t vary. For example, you can include payments like rent, credit card minimums and student loan payments.
Do you have recurring debt you make payments toward each month? Only include the minimum you must pay in each installment. For example, if you have $15,000 worth of student loans but you only need to pay $150 a month, only include $150 in your calculation. Don’t include things like utilities, entertainment expenses and health insurance premiums.
Then, divide your total monthly expenses by your total pre-tax household income. Include all regular and reliable income in your calculation from all sources. Multiply the number you get by 100 to get your DTI ratio. The lower your DTI ratio, the more attractive you are as a borrower. As a general rule, you’ll need a DTI ratio of 50% or less to apply for most loans.”
Improving Your Home Loan Application
Improving your credit score is a great place to start. Making payments on time, not using more than 30% of your total available credit monthly and paying down your debt will go a long way in raising your credit score.
Lowering your debt-to-income ratio may also help lenders see you as a desirable loan candidate. Paying down debt and trying to reduce your living expenses will help, as will increasing your income—from a pay raise to overtime to starting a side job, more money coming in makes lenders happy.
Lastly, saving for a larger downpayment on a home is appealing because that’s less money you’ll need to be loaned. Taking time to save more money may pay off in the long run. Talk to your Calcagni Realtor or your mortgage lending contacts for their advice on the best ways to improve your home loan application.