Whether you’re looking to buy in two months or two years, it’s never too early to start preparing for the mortgage process. But it’s hard to prepare when you don’t know what qualifications are needed. That’s why we put together this mortgage qualification guide, to help you understand what the mortgage company will be looking for when they review your application.
When you apply for a mortgage, your Loan Officer will help gather documentation that will then be submitted to an underwriter. It is the job of the underwriter to determine whether or not it meets specific loan guidelines, which are meant to establish your ability to pay back the loan. Each loan type has a different set of guidelines, and some may be harder than others to qualify for.
No matter what type of loan you are applying for, the underwriter is looking at several factors, including:
Your ability to repay the loan: They will look at your income and your debts to determine that you have enough gross income to repay the new loan while still paying your established debts. This is determined by your debt-to-income ratio (DTI.) Each loan program will have a different DTI limit that will need to be met in order to qualify for the loan.
Your likelihood of repaying the loan: Your credit score is a three- number score that lets lenders know how trustworthy you are when it comes to repaying your debts. All lenders will evaluate your credit score to determine your eligibility. In the eyes of a lender, a lower score means you’re less likely to make payments on time or even pay back your loan at all. Your score also determines what types of loans you will have access to, and the rate of interest that you will pay. Those who have a great credit score are more likely to get a lower interest rate than those with a low credit score. Your credit score is based on your payment history, credit utilization (how much credit you have available vs. how much you use), credit mix, and length of credit history.
The home’s value: Your lender will send a third-party appraiser to the property to determine its value. The value of the home must be greater than (or equal to in some cases) the amount that you are asking to borrow, otherwise, you will need to pony up the difference as part of your downpayment. The lender will also base something called a loan-to-value ratio (LTV) off of the appraisal value. An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. The required maximum LTV ratio will generally vary anywhere from 80%-97%, depending on the type of loan.
Your downpayment and source of funds: Your lender will want to review documentation—such as your bank statements—to ensure that you have funds available for the downpayment and any closing costs associated with your loan. If you are receiving gift funds from a family member, the underwriter will request documentation stating that the money is a gift and not a loan.