How To Get A Mortgage

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You probably already know that a mortgage is a type of loan that you use to buy a home. It’s a good idea to learn as much as you can about getting a mortgage before you start shopping for a home.

The best way to avoid wasting time is to know the players and the process. That means working with a lender to get the best possible loan.

In this article, we’ll get you ready to go mortgage shopping by going over what lenders are looking for, the paperwork involved and the five steps it takes to complete the mortgage process.

What Are Mortgage Lenders Looking For?

Lenders look at a few different factors when you apply for a mortgage with the goal of assessing your ability to pay back the loan. The key areas taken into consideration are your income and job history, credit score, debt-to-income ratio, assets and the type of property you’re looking to purchase. 

Income And Job History

One of the first things that mortgage lenders consider when you apply for a loan is your income. There is no set dollar amount that you need to earn each year to be able to buy a home. However, your mortgage lender does need to know that you have a steady cash flow to pay back your loan.

Your lender will want to look at your employment history, your monthly household income and any other forms of money you have coming in, like child support or alimony payments.

Credit Score

Your credit score plays a major role in your ability to get a mortgage. A high credit score tells lenders that you make your payments on time and that you don’t have a history of borrowing too much money. A low credit score makes you a riskier borrower because it tells lenders you may have a history of mismanaging your money.

The minimum credit score for a conventional loan is usually 620. For a government-backed loan, you’ll need a credit score of at least 580, but that can vary depending on which loan you choose.

A higher credit score can give you access to more lender options and lower interest rates. If you have a lower score, it’s a good idea to try to boost your credit score for a few months before you apply for a loan.

Debt-To-Income Ratio (DTI)

Similarly to income and credit score, your debt-to-income ratio is a strong indicator used by lenders to determine if you have the requisite cash flow to qualify for a mortgage.

Your DTI is calculated by taking the total of all your minimum monthly debt payments and dividing it by your gross monthly income.

The types of debts that you’ll need to factor into your DTI will be recurring, such as credit card statements, student loans, and auto loans. Expenses like groceries or a Netflix subscription can be left off when calculating DTI.

Depending on the mortgage type you’re applying for, the DTI a lender is looking for will vary. Typically, for a conventional mortgage, a DTI of 50% or less is the benchmark – but many government-backed loans will have higher thresholds.

Assets

Lenders want to know that you have some extra money in the bank when you apply for a loan. This assures the lender that you’ll still be able to make your payments if you run into financial trouble.

Here are a few examples of assets:

  • Savings accounts
  • Retirement accounts
  • Taxable investments

Property Type

The type of property you buy affects the type of loan you can get because different types of property change the level of risk for your lender.

Want to buy a small single-family home that you plan on using as your primary residence? You’ll probably get better terms because lenders know that primary housing costs already factor into most people’s budgets, and you’re more likely to stay up to date with your payments.

Investment properties, on the other hand,  will take a backseat to primary residences if the owner runs into financial hardship. To balance the potential risk, lenders will likely require a larger down payment and a higher credit score to qualify for an investment property mortgage.

Interest rate and buyer requirements vary depending on the type of property you’re after. Keep in mind that not every lender finances every type of property (mobile, manufactured, commercial, etc.).

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