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Qualify for a Home Loan

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Bank lenders use a number of criteria to determine whether or not to grant a home loan to an applicant. These criteria can not only determine whether you can qualify for a mortgage home loan, but can also determine your interest rate. Ensuring that you know the criteria to qualify for a home loan and taking the proper steps to prepare can thus save you thousands of dollars over the course of your mortgage, and can determine whether you are able to buy a home at all.

What is Required to Qualify for a Home Loan?

Your credit score is the first factor lenders look at when determining if you qualify for a home loan. This is a number compiled by the three major credit bureaus to help lenders and other creditors determine the risk of lending money to you. The score is determined by evaluating your payment history, debt to credit ratio (amount you owe versus amount of credit available), types of credit you use, age of your credit accounts and the amount of new credit you apply for.

A low credit score (below 600) can disqualify you from the vast majority of good home loan offers out there. However, there are lenders who work exclusively with the poor credit community, and government programs to help those with poor credit purchase homes. Of course, be aware that many of these low credit home loans will require cash reserves and may come with steep interest rates and penalties for missed payments.

Lenders also evaluate your income and assets. A lender will typically look at your income stream and earning history, your spouse's numbers ,and at your cash and asset reserves. Lenders use sophisticated metrics to determine levels of risk and hence the amount of money available to you.

How to Qualify for a Home Loan

First, you must determine how much it is reasonable for you to borrow. Experts say that homeowners should generally spend less than 30% of their monthly income on mortgage related payments, including mortgage payments, homeowners insurance and property taxes. When trying to qualify for a home loan, you want to be reasonable in your expectations.

You can also take several other steps to help you qualify for a home loan:

  • Store up a substantial savings to invest in your down payment. Putting money down on your house will not only show good faith to a lender but will also reduce the total cost of your home long term.
  • Get pre-qualified in order to understand how much lenders are willing to offer before you begin house hunting
  • Do research, on your own or with the help of a broker, before you start contacting lenders.
  • Raise your credit score by paying down debt and avoiding opening new accounts in the two years prior to applying for a mortgage.
  • If you have good credit, you may be able to shop around on your own and find a lender. Otherwise, you may wish to work with an agent or broker to narrow your list of lenders and help you qualify for a home loan. Agents and brokers are often able to help find alternative lenders or alternative financing to help almost anyone with appropriate cash and resources to qualify for a home loan.

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