Do You Qualify for a Mortgage?
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Getting a mortgage takes a bit of work and while it's not rocket science to apply, it's not something you can do overnight.
If you plan on buying a house with a mortgage loan, you have to meet certain qualifications.
Having a Down Payment is Only Part of It
When we applied for a mortgage, we had to go thorough examination of our finances. We had to provide documentation for everything.
I had to explain small gifts I made to family and friends to make sure we weren't paying back loans. My husband takes money out from the ATM for eating out and he had to write a letter of explanation to clarify it was not a bill.
Get a head start and examine your finances together to see if there is anything that looks unusual or odd. Make sure you're current with all your bills and make sure you have a positive monthly cash flow.
Can you afford being a home owner? One way lenders check is by combing through your household income. They request documentation such as W-2s, pay stubs, bank statements and previous tax returns. Our lender requested that we provide 2 years of information with our tax returns and recent bank statements for 2 months.
Debt to Income Ratio
Having a high amount of debt can ruin your chances of getting a loan. Lenders want to know that you can make these payments for years down the line and your debt to income ratio is one thing they analyze.
Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income.
You want to make sure your ratio is lower rather than higher. If your debt to income ratio is higher than 36%, you could have a hard time qualifying for a mortgage.
Loan to Value Ratio
Another reason to take your time and build a down payment is the loan to value ratio and how it affects your chances of getting a mortgage.
The loan-to-value (LTV) ratio is basically the mortgage loan amount you're hoping to get divided by the appraised value of the property you're considering to buy.
Personal Finance Posts on Buying a House
Those are some thoughts about qualifying for a loan based on our experience. If you're looking at buying a place, here are some personal finance posts to check out.
While everyone has a different take on the process, reading some other perspectives could prove to be valuable down the road for you.
- We Are Buying A House
- Should you buy or rent your home?
- How to Get a Bigger House Without Buying a New One
If you're checking rates for a mortgage, you may want to check out Quicken Loans. They have competitive rates and are a national lender.
Your Thoughts on Qualifying for a Mortgage
Has anyone bought a house in the last 6 months or so and bought a house years ago? Did you notice a change or was it about the same?
I bought a house all by myself in 2007. I had 20% down, and immediately had 50% equity in the house. My interest rate was 7.5%. Every aspect of the mortgage was handled with faxes and phone calls and took 4 weeks.
In 2010, I married and my 900 sq foot house was just not big enough for all of us and we found a deal we couldn’t resist on a 2200 sq foot house. Every day, we were faxing, mailing or dropping something off at the mortgage company. We made the offer on the house in January and finally closed (without any additional delays) in May. Many times, I wanted to give up and just stay in my cozy little house. We were able to get the mortgage with 3% down at 5.75% interest. Luckily, with minimal work, this house also has 50% equity.
Of course, we didn’t qualify for a tax credit. Our income is ok, but we have no other debt. Our credit scores are around 720. Both mortgages are about 25% of our income.
Now that it is all over, I am glad the interest rate is lower, but I wish our second loan would have been as easy as my first one. In a way, I’m glad it took longer, because that gave us additional time to save up for the things that we wanted to do before we moved (paint, etc). I also was surprised they didn’t make us sell my house before giving a mortgage. We have plenty of time to move (which we needed) and decide what to do with my house. But it really was a world of difference 3 years ago.
Mortgage companies are still willing to just willy nilly qualify people for mortgages. My wife and I refinanced our home and it was approved and done solely on my income. I couldn’t afford my payments on my own but apparently the bank thinks I can. Just because you CAN get a mortgage doesn’t mean you SHOULD.
@Ashley: Great job on having the big down payment! Thanks for sharing your perspectives on buying a house now vs a few years ago. I don’t mind a bank being careful with loaning money, I think it’s better in the long run.
@Kyle: So true! Our bank told us we could afford about $75,000 more than the house we went after. You really have to look your finances and stay within a budget that is comfortable for you.
I used to qualify very easily when I was back in London with a good full time wage…. However 2 countries later, self employment and low earnings and shot credit mean there is no chance for me…. luckily I have no plans of taking on credit for myself ever again!
Qualifying for a mortgages has never been easy. I believe one’s debt to income ratio has a major role to play in order to qualify for a loan. I’ve never thought about buying a home, this is certainly not the time for me.
Here in Canada the government decided to take preemptive steps (maybe too prudent) and tightened the mortgage rules significantly. All borrowers must qualify for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term. So certain groups (young first-time buyers) have significantly lower chances now…