Qualifying for a mortgage is a big step on the way to becoming a homeowner. Here’s what you need to know about credit checks, pre-qualification, income verification, and down payments.
How to Qualify for a Mortgage
Qualifying for a mortgage means you are firmly on the road to becoming a homeowner, but getting there can be a nerve-wracking process! Let’s take a look at what goes into a typical mortgage approval process and answer some of the questions you may have.
What Do You Need to Qualify for a Mortgage?
To qualify for a mortgage you’ll need to demonstrate to your bank or credit union that you’re willing and able to repay the money they will lend you to buy your house. Lenders will look carefully at your financial background before approving you for a mortgage.
As part of your mortgage application with a lender, you’ll need to show:
- A good credit report: When you apply formally for a mortgage, lenders will check your credit score and go through your credit history. You will likely need a credit score well over 600 to qualify for a competitive mortgage, and records of outstanding debts, missed payments, or unpaid bills will reflect poorly on your creditworthiness.
- Evidence of income: You’ll need to provide evidence of employment or income, including pay stubs, invoices, and bank or tax records to show you’re regularly earning a reasonable income.
- Evidence of assets: You’ll need to list other assets you already own, such as savings or investments you have, or evidence of money you’re owed.
- Records of your spending: You’ll need to provide details of how you spend your income each month and how much you save or contribute to retirement accounts.
- Details of your liabilities: Lenders will be particularly concerned about debts you already have, including car payments, student or personal loans, credit card debt, and even alimony or child support obligations.
Your lender will use this information to assess crucial measures of your ability to repay your mortgage, including:
- Your overall creditworthiness
- How much of your monthly income is already going to pay down debt
- Your overall debt-to-income ratio
Most importantly, you’ll need to demonstrate your commitment to maintaining a home and paying off your mortgage by contributing a chunk of your own money in the form of a down payment. For conventional loans, this is usually between 10% and 20% of the value of the property but can be less for some higher interest mortgages or longer-term loans.
How to Get Pre-Qualified for a Mortgage
A common step when you’re ready to begin house hunting in earnest is to get pre-qualified for a mortgage. This is an informal check of your credit score and financial background that a lender uses to estimate the amount and terms of a mortgage they might be willing to approve. You can usually get pre-qualified within a few minutes after speaking with a mortgage officer.
Unlike a mortgage application, a pre-qualification does not require a formal check of your credit history and will not affect your credit score. Also, a pre-qualification is not a formal commitment by a lender to offer a particular loan principal or rate and should not be used as a guarantee of financing when negotiating with a seller.
Common Questions About Qualifying for a Mortgage
Qualifying for a mortgage can be a complicated process, especially if you have poor credit, uncertain income, or outstanding debts. Here are some common questions many potential borrowers ask:
What Income Can Be Used to Qualify for a Mortgage?
Lenders will look more closely at how you earn your income than at how much you earn. A lender is looking for a solid track record and evidence that you will continue to earn a steady income in the future. Provided you can show this, lenders are prepared to consider a wide variety of income types including:
- Earnings by self-employed contractors, freelancers, and business owners
- Dividend income from stocks or other investments
- Retirement income from a pension fund or annuity
- Some types of social security income
- Alimony and child support payments
Can a Retired Person Qualify for a Mortgage?
Yes, retired people can and do get approved for mortgages. They are free to draw on lump sum retirement fund payouts, personal savings, plus pension and annuity payments. They must however be able to show that their current income will continue for at least three years.
Can I Use Unemployment Income to Qualify for a Mortgage?
Unemployment income is difficult to include in a mortgage application. Lenders usually require evidence that you have earned at least two years of income from a steady source and are likely to continue to earn the same income for another three.
While you may have a solid record of earning income prior to becoming unemployed, most states only provide unemployment benefits for 26 weeks or less—well short of the three years of future income most lenders require.
Do Mortgage Lenders Look at Rental History?
Your credit history should not include on-time rental payments because this doesn’t count as debt. If, however, you are late in making a rent payment, this does become debt and is reportable to a credit bureau which can have a major impact on your mortgage eligibility.
At the same time, many first-time mortgage applicants stand to benefit by demonstrating a solid rental payment history. Recently, Fannie Mae allowed applicants to give lenders permission to use bank account records to consider up to 12 months of rental payment history.
Let Belco Answer Your Mortgage Questions
If you’re looking to apply for a mortgage or refinance an existing home, Belco is here to help. Belco offers our members a wide variety of loan programs at low rates, along with helpful advice for first-time and repeat borrowers.
Belco has been opening doors for homeowners in central Pennsylvania for decades. Talk to one of our friendly loan originators today to find out how we can help you qualify for a mortgage.
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