How to Qualify for a Mortgage
Few people have the cash on hand to buy a house outright. That makes learning how to qualify for a mortgage a must if you want to make the leap from renting to owning. Understanding the process allows you to prepare yourself and increases your odds of success.
Mortgage Qualification Basics
When lenders are determining whether you qualify for a home loan, they’re gauging your ability to repay it. Having your credit and finances in order is essential. Lenders will consider your credit score and history, income, assets, and debts, so you need to be ready to demonstrate that you’re capable of managing credit and able to meet your financial obligations. Money offers some tips to help you make your case:
- Strengthen your credit score. Your credit score is a three-digit number with a huge impact. It affects the type of loan that you can get, the amount that you can borrow, and the interest rate that you’re offered.
- Save for a down payment. Different types of loans require different down payments. Putting down a larger down payment can help you secure a lower interest rate. It can also shrink the size of your monthly mortgage payments. It’s worth noting that a down payment isn’t the only expense that new homeowners will need to save for. They’ll also face closing costs, moving expenses, and other miscellaneous fees.
- Reduce your debts. Lenders use your debt-to-income ratio to gauge your ability to afford a mortgage. Reducing your debts before you seek a mortgage improves your odds of being approved for a loan.
- Seek preapproval.* Smart homebuyers don’t start their search at open houses. Instead, they head to a lender first. Getting preapproved confirms that you are a serious buyer who is able to qualify for a mortgage. It also tells you how much you’re able to borrow, so you know how much you can afford to spend. Plus, it offers a chance to spot any difficulties with your credit or finances early so that you can clear them up before you find your dream home.
Choosing the Right Loan
Once you understand the basics, it’s time to look more closely at the details. Different types of home loans set different requirements, so the standards that you’ll need to meet depend on the home loan that you want to use.
- Conventional loans. For a conventional loan, you’ll need a modest down payment.
- Jumbo conventional loans. Jumbo loans are riskier for lenders, so qualifying is tougher.
- FHA loans. Qualifying for these government-backed loans is more relaxed.
- VA loans. Qualified borrowers can get 100-percent financing with no down payment requirement.
- USDA loans. There’s no formal down payment requirement. Requirements vary by lender.
*All loans subject to credit approval and identification of acceptable property. Conditions and restrictions may apply.