Qualifying for a Home Loan



So you’ve decided to buy a home? Being a homeowner is a very rewarding feeling. To take ownership of your own ‘space’ in this world, it’s definitely an accomplishment. But there’s quite a bit that goes into purchasing a home, and one of the most important considerations is if you qualify for a home loan.


The process for getting a home loan is very stringent. In order to get the best rates, there are several qualifications you must meet. Below we’ll break down the biggest considerations lenders take into account when approving borrowers for a loan.


Down payment- the first thing most banks and lenders will look at is what are you bringing to the table? The recommended amount required for a down payment is 20%. Some lenders will still approve you with less than that, but it’s a good goal to put down at least that percentage. The more money you can pay down in the beginning, the less financing you need - which means you will pay less interest over the long run.




Credit Score- your credit score is very important when trying to borrow funds for a home purchase. Most lenders are looking for scores north of 620. It doesn’t mean you can’t qualify for a loan if your score falls below that threshold. However, you will be considered a ‘subprime’ risk and will have to pay higher interest rates. For the absolute best rates in the industry, your score should be 720 or higher.


Debt-to-Income ratio- when reviewing your finances, your debt-to-income ratio is high on the list of considerations lenders make. The total monthly debt you pay (including credit cards, car loans, etc) should not be more than 36% of your gross monthly income.

How much of a down payment you can make, your credit score, and your debt:income ratio are the three most important items that lenders will look at. If you meet these criteria, you might be wondering what types of documentation you will need for them to process the loan. Some lenders may require additional documents, but typical items they will ask for are:


-Paystubs for the past two months

-Two years worth of W2’s

-Your tax returns for the past two years

-Bank statements for 2 months

-Statements from investments or retirement accounts

-Social security or pension award letters (if applicable)

-Divorce decree or bankruptcy documents (if applicable)

If you’re self employed, you will also need:

-Business tax returns for the past two years

-K1’s for the past two years



Here are some Dos and Don’ts if you’re in the process of getting a loan.


DO:

  1. Pay bills on time

  2. Be available and prepared when it’s time for your appraisal

DON’T:

  1. Open a new debt (like a credit card or car loan)

  2. Let anyone but your lender pull your credit score

  3. Co-sign another loan for someone else

  4. Quit your job

As you can see, it’s not the easiest thing in the world to qualify for a home loan. Learning to manage your money is very important to ensuring a simple buying process. In addition, if you use some common sense and follow our simple list of Do’s and Don’ts, you’re well on your way to making your home buying dream a reality.

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