Whether applying for a purchase loan or refinancing your existing mortgage, there are dozens of different things that can impact your ability to qualify for a loan to varying degrees. Some of the most significant are:
- Credit Score – One of the “Big Three” pillars of qualifying for a loan. Higher scores make multiple loan options available to the borrower including those with the best (lowest cost) terms. Lower scores can limit your options and often lead to higher long-term costs.
*See Also: CREDIT SCORING 101
- Debt-to-Income Ratio (DTI) – This is a percentage calculated by dividing certain monthly debts by the borrower’s gross monthly income. Generally speaking, having a DTI under 43% is a good thing but some loan programs are okay with it being a little higher. Keep in mind, the new mortgage payment is included too. This is number Two of the “Three”.
*See Also: The American Express Payment Problem
- Assets – Number Three is the funds needed for the down payment and/or closing costs. Being able to document that the money came from an acceptable source is extremely important due to anti-money laundering laws. Taxes and homeowner’s insurance also must be paid for and having money in the bank after all these things are covered can often be a big factor.
*See Also: Income and Assets | What You Need to Know
- Employment history – Though it varies for each loan program, it is generally desirable to be with your current employer for at least 6 months when you apply for the loan. There are exceptions to that rule however, and jobs with variable compensation or self-employed borrowers are likely to need 24 months history. One the other end of the spectrum, you may be able to qualify using only an accepted offer letter for future employment.
*See Also: First-Time Homebuyers’ FAQ
There are many other data points that are evaluated when a borrower applies for a mortgage loan – too many to list them all here. The best approach and the only way to know for sure is to speak with an experienced mortgage lender and submit a loan application early on. That’s when your lender can start crossing off things on that list and show you what loan terms are really available to you.