There are varying home loan products, and every mortgage lender or broker can have a unique set of requirements for the loans they offer. All that said, there are a handful of typical mortgage requirements that you should be aware of when considering if you will qualify for a home loan.
Credit score. This is the primary factor when lenders are determining what kind of loan you qualify for. Obviously, the better your credit, the better your options will be. Years ago you might have been able to get a “sub-prime” loan if your credit score was down around 500. But thanks to the mortgage crisis in recent years, and the resulting changes in underwriting requirements, this is much more rare these days. There may be a few lenders out there who will lend to someone with a 500 score, but it is often accompanied by a much higher down payment requirement, as well as tighter, more strict income requirements.
Generally speaking, if you want to get into a conventional mortgage with reasonable rates, you will likely need to be around the 620 mark at the least. Even at that level, however, you may find some pricing adjustments. Pricing adjustments are adjustments to your interest rate or costs based on your credit score or other factors. Generally speaking, the higher your credit score, the lower your rate. For example, you could potentially qualify for a decent interest rate with a credit score of 640, but may be able to get a lower rate with a score of 720. In fact, 720 seems to be the target these days in terms of the best rates available, with 760 and above all but assuring you the best rates and terms (so long as other underwriting factors are in line, of course). Keep in mind that while the credit score generally reflects your overall credit history, your credit history and score can be weighed independently of one another in some cases. For example, you may have a decent credit score, but if you have some late house payments on your credit report, that could cause some trouble for you. This can be especially true if you are currently renting and are looking for a mortgage to buy a home. If you currently have a mortgage and you have made some late payments, that will likely affect your credit score accordingly. With renting, however, your rent payments often are not reported to the credit bureaus. This being the case, you could have a solid credit score, but if your landlord provides a poor payment history report to your lender, that could cause issues. Obviously, if you pay your bills on time, then you shouldn’t have this problem.
Income is another major factor. All lenders will have a debt to income ratio (DTI) requirement, which determines if you meet the minimum income requirements by comparing your income to debt payments. Keep in mind that your DTI is the primary factor in determining how much you can borrow. That is why it is good to get pre-qualified before buying a home. With the pre-qualification, you will find out how much you can borrow, which will help you focus in on which homes you should look at.
Lastly, another factor is the amount of “reserves” you have in your checking or savings account. This is referring to how many months’ worth of house payments you have sitting around somewhere. In most cases, it’s ideal to have at least three months of reserves in an actual bank account. Having a stash of cash under your mattress or in a safe is great, but it’s very hard to document. Lenders will often ask for three months of bank statements to prove that you have enough reserves to meet the qualifications. For example, if your house payment (total PITI) will be $1,000, and if the lender requires three months of reserves, then they will want to see at least $3,000 sitting in your bank account as an average daily balance. In other words, if you start the month with $3,000 but quickly spend it all every month, then you don’t have an average monthly balance of $3,000. This is why it’s often best to have reserves in your savings account, so it’s easily identifiable as reserves that are not spent every month.
As noted above, the lender may ask for more than one bank statement. This is because they want to make sure you didn’t just throw $3,000 into your account that you borrowed from a friend or relative. They want to see that you’ve had this money sitting around for awhile, as this makes it more likely that the money will remain there once the loan has closed. It’s all about security for the lender, and the your perceived ability to continue making the payments, even if you have a bad month or two. Remember, it’s always good to have a savings account to cover unseen expenses or an unexpected loss of income, but with home loans, you’ll likely have to prove it.
So while you may typically need three to six months of reserves, keep in mind that this too is flexible, depending on the rest of your qualifications. If your credit score is high enough, you may get away with only having $100 in savings! All of these factors will be figured out when you apply for a mortgage with your lender or broker. They will weigh all of your factors and will be able to tell you what you will qualify for, based on your unique mix of qualifiers (credit score, income and reserves). This will allow them to tell you how much you can be approved to borrow (KEEP IN MIND: Just because you are approved for a $500,000 loan does not mean you should borrow that much. Keep your budget needs in mind, regardless of what you are approved to borrow.), how much of a down payment (in a percentage) would be required, and what kind of interest rate you would likely qualify for.
If you would like to talk with a mortgage loan specialist, please fill out the form to the right and we’ll put you in touch with a lender or broker who can help you get started on your way to getting a home loan!