Shopping for a home is an exciting and meaningful time in your life.
While touring houses can be fun in hopes of finding the perfect home, there are still many factors to consider.
The qualifications for the mortgage loan you want are one of the most important factors.
Without the right mortgage, you may end up financially strained or, worse yet, unable to purchase your dream home.
We will review preapprovals, the essential qualifications for mortgages, and what you should expect as you continue your home buying journey.
We’ll also review some incredible resources that make the entire process seamless and pain-free.
Is preapproval necessary?
Getting preapproved for a loan before you begin your house hunt isn’t a requirement but it should be a necessity for you.
Preapproval tells buyers how much of a mortgage loan their lender will qualify them for.
It would be terrible to find your dream home but later find out you can’t qualify for the necessary amount of loan.
A preapproval considerably smooths the application process for a conventional mortgage since the lender will already have your information collected.
Preapprovals are typically valid for 2-3 months as you search for a home. Preapproval letters hold a substantial weight as it means the lender has already verified the buyer’s proof of income, credit score, and documentation for approval. Sellers often won’t accept offers from those without a letter of preapproval.
When you’re ready to apply for preapproval, you can expect to provide the following documentation:
- Tax returns
- Employment information
- Bank Statements
- Pay stubs
- Investment Income
- List of assets and liabilities
- List of residencies
It’s important to know that preapproval is not the same as qualifying for a mortgage—it’s a step taken to help you qualify for a mortgage.See What You Qualify For
What is needed to qualify for a mortgage?
While each lender has unique qualifications for mortgages, there are common qualifications you can expect.
The most common qualifications for a mortgage are your credit score, credit history, employment history, as well as proof of income and current debt.
Your credit score shows how well you manage your debts. While the score requirement depends on your lender, you typically want to aim for a credit score of around 620 and up.
The higher the credit score, the better the interest rate you could qualify for, and possibly even a lower down payment.
Your credit history is essential to determine if you pose any potential risk as a lender.
Your credit report discloses any delinquencies, late or missed payments, and how many lenders you’ve worked with.
Don’t be discouraged if you have red marks on your credit history. This isn’t necessarily an automatic disqualification but another factor that goes into your home mortgage offer.
Employment history and proof of income
Again, lenders want to ensure that you can make your monthly mortgage payments, so they’ll want to review and verify your current employment and employment history.
Lenders want to see consistent monthly income and if you can afford what you’re applying for.
Be prepared for lenders to examine your current debt standings and how much you owe. This will determine your DTI, which can be another requirement for some lenders.
It would be a good idea to pay off any debts before applying for a mortgage, as this will help your DTI ratio and qualify for a mortgage.
What is DTI?
DTI stands for your debt-to-income ratio.
This ratio shows the amount of your monthly debts, compared to your monthly income. Your debt can include any credit cards, student loans, personal loans, car loans, or any outstanding monthly costs.
This is another prerequisite to qualify for a mortgage. Your DTI ratio is unique to your financial situation, and lenders may have various limits.
You can calculate your DTI by adding up all of your debt and expenses and dividing that by your total income.
With AAA Banking’s conventional purchase mortgage, we require a DTI ratio at or below 50%.
What is LTV?
LTV is an acronym for loan-to-value ratio. Your loan-to-value ratio is the loan amount you’re applying for compared to your home’s appraised value.
You can calculate your LTV ratio by dividing your loan amount by the appraised value of your home.
While each lender varies in their LTV ratio limits; typically, the lower the ratio, the lesser the risk for the lender.
Having a lower LTV may also benefit your mortgage rates. However, you may have to pay a higher down payment.
This isn’t necessarily a bad thing because the amount you put towards a down payment becomes home equity.
A higher down payment also means you’ll pay less in your monthly mortgage payments.
If you have a higher LTV, you may pay more in interest rates and have to obtain premium mortgage insurance, which will add to your monthly mortgage payments.Start your loan application
Next steps to qualify for a mortgage
As you can see, a lot goes into qualifications for a mortgage and obtaining your dream home, but there are plenty of resources and tools to help you along your journey.
One of the most substantial resources available is our partner HomeScout. Think of it as your one-stop shop for everything you’ll need as you begin your home buying journey, as it streamlines the entire process.
HomeScout shows you legitimate and current listings, connects you with a trusted and experienced realtor in your area, and guides you through each successive step.
It also allows for communication between yourself, the realtor, the buyer, and the lender.
If you’d like to learn more about HomeScout or you’re interested in our conventional purchase mortgage and its qualifications—connect with one of our experienced specialists.
We offer flexible requirements for qualification for mortgages, with low down payment and rate options. We’re prepared to help you meet your financial goals and answer any questions you may have.
Connect with AAA Banking today.Apply Now