How to qualify for a mortgage loan

What is a mortgage loan?

A mortgage loan is a loan used to buy a home. The home is the collateral for the loan and acts as a guarantee that the loan will be repaid.

How mortgage loans are approved.

There are several factors involved in the approval process of your mortgage application. These include your income, your current debt, your credit history, your employment history and the property itself. Each applicant’s specific situation is different. The right mortgage professional can work with you and evaluate all of these factors during the approval process.

Income. The first question is how much of your total income will be spent on housing. The mortgage lender uses this information to decide whether your new home will stretch your budget too much. When you are qualifying for a loan, lenders usually use your gross income (all the money you earn before taxes) to determine the monthly mortgage payment you can afford. Gross income may also include the average of overtime pay and commissions, and child support or alimony, if you wish to have them considered. Use the How much home can you afford worksheet on this website to help you determind what you can afford.

Monthly mortgage payment as a percentage of your income. In general, lenders require that your total monthly mortgage payment, in principal, interest, property taxes, mortgage  insurance, hazard insurance and any homeowner association dues – should be no more than 28% to 33% of your monthly gross income. Sometimes you may have to stretch that percentage to get into a home. There are flexible loan choices available to homebuyers. A mortgage professional can go over all of these options for you.

Your total debt situation. Your mortgage payment is just one part of your total monthly expenses. You may have a car loan, student loan, credit cards, child support, alimony of other monthly expenses (excluding basics like utilities and groceries) not exceed 38% of your gross monthly income. If your debt exceeds this amount, you may be able to qualify for alternative financing options. Use the Budget planning for home ownership worksheet on this website to prepare a bill-paying schedule you can live with.

Credit History. A satisfactory record of paying your bills on time is an important part of getting a home loan. But many people experience hardships now and again that are beyond their control. If you’ve had bad credit difficulties within the past two years, a good explanation of any late of missing payments on y our credit report will be taken into consideration.

Employment history. A history of steady employment and/or earnings, no matter what your profession, is desirable. Lenders usually prefer to lend money to people whose incomes have grown steadily over the past several years and who have worked consistently in the same or related occupations. You will need to verify employment. If you are self-employed, work on commission or have been at your job less than two years, you may need to provide additional information about your work history.

Property appraisal. Before a mortgage loan is approved, the appraised value or the home must be determined. An appraisal is based on the home’s condition and selling prices of comparable properties in the area and confirms that the property is worth the purchase price you are offering for the home.