You Ask, We Answer: How Can I Qualify for a Home Loan?
Spring is here, and you’ve got real estate on your mind. At Calcagni Real Estate, we know just how you feel. Buying a home in Connecticut is always a good idea, but with interest rates still low, the promise of better weather on the way and the thought of summer fun in a new house, it seems more appealing than ever to make a move. Now that you’ve chosen your Calcagni agent, qualifying for a home loan is probably at the top of your mind. Here are some of the biggest things lenders take into account when you apply for a mortgage—and how you can improve your application to ensure you get the best loan possible.
Not surprisingly, one of the first things lenders want to see as they consider your home loan application is your household income. While there is no minimum dollar amount required to buy a home, your lender’s job is to ensure that you have enough income to cover your monthly mortgage payments and your other bills. Your salary will be considered, but in addition, other streams of reliable income will be used to calculate your total earnings. Income from a side job, commissions, military benefits, alimony and child support payments, Social Security payments, investments and overtime earnings all come into play when it comes to your home loan. Lenders will generally consider these payments if they’re scheduled to continue for at least 2 years.
While your household income is a crucial part of being considered for a home loan, mortgage lenders want to take the full picture into account. That means they’ll be looking at your assets to ensure that should you face a financial emergency, you can keep up your payments. Assets can be anything from savings and checking accounts to stocks, bonds or mutual funds; assets also include CDs, IRAs and 401(k)s and other retirement funds that can be used to continue paying your home loan.
You may have heard that a good credit score is important to lenders for securing a home loan, but understanding the impact of your score on your home loan is just as critical.
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.
While your credit score gives lenders a look into the kind of borrower you are, your debt-to-income ratio is another critical part of the lending puzzle. Knowing how much debt you carry vs. the amount of money you have coming in will help lenders determine if you can afford to cover all your bills.
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
Now that you know what lenders look for, how can you improve 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.