Mortgage requirements: What you need to know
Buying a house is a huge undertaking. From searching for the right place to making a successful offer, a lot goes into landing your dream home. And one of these big steps is getting approved for a mortgage.
When you apply for a mortgage, there are several things lenders consider. These factors impact not only your chances of approval but also the rates and terms you qualify for. To make your mortgage application successful, it's important to know what lenders are looking for.
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Mortgage requirements to know
Here's what lenders want to see when evaluating your mortgage application.
Credit score
Your credit score plays a significant role in determining your eligibility for a mortgage. Your score reflects your borrowing history and ability to repay a loan on time. The higher your score, the more likely you are to obtain a mortgage with favorable terms.
Lenders typically prefer borrowers with a score of 620 or higher. However, a score of 740 or above will likely get you the best rates and terms. If your credit score is less than ideal, there are steps you can take to improve it before applying for a mortgage.
Debt-to-income ratio (DTI)
Lenders also consider your debt-to-income ratio (DTI). This ratio shows them how your monthly debt payments compare to your gross monthly income. The higher your DTI, the more likely your budget is strained — and the more trouble you may have with keeping up with your mortgage payments.
Your DTI is calculated by adding up all your monthly debt payments (such as credit cards and auto loans) and dividing them by your monthly gross income. Generally, lenders prefer a DTI ratio of 43% or less, but some may accept higher ratios. Keep your DTI as low as possible to increase your chances of approval and secure the best rates and terms.
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Income and employment
Another factor that demonstrates your ability to repay your mortgage is a consistent work history and sufficient, steady income. Typically, lenders will ask you to provide at least two years of employment history to approve you for a mortgage.
Down payment
Most lenders require a down payment of 20%, but some lenders may accept as low as 3%. That said, keep in mind that a smaller down payment means you'll be making larger payments every month and may have to pay private mortgage insurance (PMI).
Property appraisal
Before approving a mortgage, lenders require an appraisal of the property you're purchasing. The appraisal helps them determine the actual value of the property. This appraisal may be done by the lender, or they may hire a third-party appraiser.
The property's appraised value is based on factors such as the home's condition and location. If the appraisal comes in lower than the asking price, it may affect how much you can borrow.
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The bottom line
Purchasing a home can be daunting, but knowing lenders' mortgage requirements increases your chances of approval for a loan with the best rates and terms.
These requirements can vary by lender, so be sure to research and shop around for the best options for your situation. Once you know what lenders are looking for, you can take steps to improve your chances of having your application approved and starting your homeownership journey off on the best financial footing.
