Mortgage Qualification Criteria
Conventional and FHA loans are the most common types of mortgages. Conventional loans are purchased by Fannie Mae and Freddie Mac (the two largest government-sponsored lenders) and follow the guidelines they set. FHA (Federal Housing Authority) is a government program run by the U.S. Department of Housing and Urban Development that insures loans approved by lenders using this program. FHA, designed for first-time home buyers, typically allows lower down payments and weaker credit history than conventional loans do. While the three agencies provide different types of loans, what they look for in a potential borrower is similar.
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Credit History
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Mortgage lenders look for borrowers with a good pattern of paying their obligations. Each credit bureau provides a credit score, which is based on the consumer's credit history. Mortgage lenders analyze the credit reports from all three credit bureaus and the corresponding credit scores. Lenders will use the middle of the three, so if the scores are 664, 678, and 671, the 671 score is used to qualify. The higher the credit scores the better the rate and terms allowed. Many things affect the scores, but the most important is the timely payment of loans. Items like bankruptcy and foreclosure can automatically disqualify a borrower from obtaining a loan for years.
Income Requirements
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Stable consistent income is required. Lenders look at the borrower's proposed DTI (debt-to-income ratio, or the amount of all monthly debt in relation to gross income earned). Lenders look for a DTI ratio not exceeding 36 to 40 percent of the gross income when possible. Sometimes lenders exceed this amount with other compensating factors like excellent credit or large down payments. A two-year work history is usually required in the same job and field. Newly self-employed borrowers usually must wait until two years of self-employment tax returns are available before obtaining a new mortgage.
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Asset Requirements
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Borrowers who show a history of saving money are considered less of a risk than those who do not. While a full 20 percent down payment is not always required, there are very few zero down payment loans available other than VA loans for veterans. Depending on the loan program, the down payment can be a gift from relatives. Most conventional loans require a minimum of 5 percent down, but FHA loans may require less than that. Lenders prefer, although do not always require, the borrower has at least two months payments in reserve when a loan is approved.
Property
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An appraisal is required on virtually every mortgage loan. A licensed appraiser uses the recent sales in the property’s neighborhood to estimate a value for the home. Appraisers provide at least three recent sales, called “comps” or “comparables,” on the report. They should be close in style and desirability to the subject property and the home’s neighborhood. Appraisers cannot use four-bedroom houses to determine a value for a two-bedroom home, or vice versa. Lenders want to see the home is in good condition and is valued at or higher than the purchase price.
Considerations
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The best way to know how much you qualify for is to apply with a lender. Every lender has different programs and lenders want to find a mortgage for you to buy a house. Even if you think you do not meet the requirements, apply anyway. If you are not granted credit, you will know what is needed to be approved next time.
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References
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