How to Qualify for a Mortgage

posted on Tuesday, October 29, 2019

How to Qualify for a Mortgage

A Brief Guide For Home Buyers

1.  Know your credit

• Credit scores above 660 will give you the most options; however, some applicants may qualify down to a 580 credit score.
• Have minimal non-medical collection accounts/NO judgements; any judgements must reflect “released or satisfied” status.
• Have minimal to no late payments within the last 2 years.
• Current rent or mortgage payments will be verified, no late payments within the last 12 months.
• Disputed accounts should be resolved and updated on credit reports prior to applying.
• Co-signers can NOT be used to offset derogatory credit.
• www.annualcreditreport.com – this is the government sponsored website that will allow you to get your credit report from each bureau for free, once per year.

2. Save for a Down Payment & Reserves

• Down payment assistance programs can help, but you may still need to make a minimum contribution, $1,000 or 1% of purchase price . . . . whichever is greater, is common.
• Cannot own other property with these programs and there is an income limit for qualifying.
• Money for your minimum contribution for the down payment assistance may need to be from acceptable sources; not a gift, borrowed, or cash saved at home.
• Programs are available that allow ALL gift funds for down payment (FHA), Fannie’s Home Ready, Freddie’s Home Possible.
• Reserves: The bank will want to see that you have an ”emergency fund” established so that you can make the mortgage payments in the event of an emergency . . . . such as losing your job.
  • Usually 2 months of the total mortgage payment; principal, interest, taxes and insurance.
  • This is not always required, but if you are weak in other areas, such as having a lower credit score, having ample savings in the bank could help you get approved when you may otherwise have been declined.

3.  Maintain a Stable Work History

• A 2-year work history will be verified; cannot be through a Temp Agency.
• Job changes within your 2 yr history are acceptable, as long as the job change was in the same line of work and improved your financial status.
• Must have filed Federal Tax Returns or have documentation to support otherwise.
• Social Security and/or Disability may result in lack of Tax Returns if that is the only source of income.

4.  Get Pre-Qualified

• When you have accomplished all of the above, contact your lender to get pre-qualified.
• Your lender will look at your credit, work history, savings, income and debt payments and help you determine what price range you can qualify for
  • Make sure your monthly debt payments (loans, credit cards, child support payments) do not exceed 45% of your GROSS (before taxes and deductions) monthly income and for some loan programs 41-43% (total debt/total income = ≤ 45%)
• Child Support can be used as a source of income, but it is not required.
  • Support must have been received for at least 6 months (3 months for FHA) and must continue for 3 yrs.
  • We will need a copy of the child support agreement and proof of payment history.
• Basic items to have for pre-qualification
  • 30 days of Pay Stubs with YTD amount, or documentation of current income.
  • 2 yrs Federal Tax Returns, all pages, with W-2’s and/or 1099’s (we do NOT need state returns.)
  • 2 months of bank statements, all pages, to show funds for closing and reserves.
  • We always need complete copies and ALL pages of statements and documents even if there is a page that is blank “intentionally left blank” usually appears, and we still need those pages.
• Think about what monthly payments you would be comfortable making each month. Just because you can qualify for a certain price of home . . . doesn’t mean you will be comfortable making the payment that accompanies that said home.
  • Remember, your monthly payment can fluctuate yearly based on your changing real estate taxes and home owner’s insurance. When the cost of these items change, your payment will change as well to accommodate what is being collected for your escrow account (the account that is used to pay these items when they come due.)

5.  Lastly, when you have questions . . . . . contact your lender!