What Does Being Well Qualified for a Home Loan Mean?

If you are in the process of preparing to buy a home, at the top of your priority list is probably getting the best home loan you can. Qualifying for a mortgage can be a daunting process, but it doesn’t have to be. There is much more to being well qualified for a mortgage than just making enough money, and when you are equipped with the right information, you can be a well-informed and totally prepared applicant. Read on to learn what a mortgage lender looks for in the qualification process, and how to make sure you are well qualified.

Credit Score

Mortgage brokers will look at your credit score as one of the descriptions of your financial responsibility. There are five credit score categories, and the category your score falls under is more significant than the exact number. The five categories break down this way: 300-579 is poor, 580-669 is fair, 670-739 is good, 740-799 is very good, and 800-850 is excellent. Having “very good” or “excellent” credit will make you the most well qualified.

Credit Utilization

The most well-qualified borrowers will also have a low utilization rate. This means that the credit cards and personal lines of credit you have are far from being “maxed out.” The utilization rate is calculated by comparing the balance you carry to the credit limit. For example, if your credit limit is $10,000 and you have a $2,500 balance, you have a 25% utilization rate. Well qualified borrows will ideally have a utilization rate below 25%. You can achieve this by paying down your balances, asking for a credit limit increase, or both.

Recent Applications

If you have recently applied for multiple loans, that will be visible to your mortgage lender and may present a red flag. If they see that you are applying for a car loan, buying appliances on credit, and seeking mortgage pre-approval all at once, it will be clear that your financial situation is about to change significantly. It’s best to apply for a mortgage alone, and wait to make those other credit applications until after you’ve closed on your home.

Verified Income History

When you consider what your mortgage budget is, and how much you are applying for, you likely take into consideration how much you’re bringing in each month. When a mortgage broker looks at your income, they will only take into account income that has a two-year or more history and comes from a verifiable source. “Side gigs” that you consider reliable may not be enough for a mortgage lender, and being paid under the table in unreported tips or cash is also going to present a problem. The most well-qualified buyers will have a verified income history of at least two years, with tax returns to prove the income.

Debt to Income Ratio

Mortgage brokers will also look at your debt to income ratio. Even if you have an excellent income, a large amount of debt is going to present a problem. Lenders will look at your debt to income ratio, which is calculated by looking at your income compared to your monthly debt payments. For example, if your income is $5,000 per month and your monthly debt payments come out to $1,000 per month, you have a debt to income ratio of 20%. Lenders generally look for a debt to income ratio below 28%, but the lower the better.

Cash

Finally, lenders will ask for bank statements to verify that you have the cash on hand that you say you do for closing costs and down payment. They will also verify that this money was not recently deposited from an unverified source, like a large personal check, Venmo transfer, or cash deposit. The most well-qualified borrowers will have a consistent history of bank statements with a slowly increasing total, and the amount will be obviously supported by the regular income of the borrower.

If you’re still not sure if you’re ready to apply for a mortgage, or you’re wondering how to become more well qualified, check out more of our tips for how to improve your credit score or save for a down payment. For all Marco Island luxury homes and property or applying for a jumbo mortgage, contact my office today. I have referrals and trusted lenders ready to run the numbers.