Many borrowers want to take advantage of the record-low interest rates that are currently available, and are anxious to do so before home prices rise. But lending requirements are much stricter than they were in the mid-2000s, as a result of the exposure of bad lending practices that ultimately contributed to an explosion in foreclosures. Requirements are more stringent for condo loans than for single family homes. Now, some borrowers find that today’s requirements make it difficult or impossible to qualify for a loan.
A great credit score is far from the only thing you’ll need to be approved for a mortgage. Here are the criteria most banks evaluate:
The more money you have in savings, the better you’ll look to the bank.
For a down payment, you’ll need at least 20 percent of the purchase price if you want the very best terms on a conventional loan. But for certain FHA condo loans, you can get in with as little as 3.5 percent down. Keep in mind that most lenders will require you to purchase mortgage insurance until your equity equals 20 percent of the home’s value.
If you’re selling a home, that sale must close before your lender will consider the cash it generates.
The lender wants to see evidence of steady income that is likely to continue. If you have W-2 income, you’ll need to be on the job for a minimum of six months. If you have income from a second job, the lender might not consider it unless you’ve had that job for two years or longer. You can ask the lender to consider certain other types of income, like alimony or child support, if it will help you qualify and you expect it to continue for a period of time. In those cases you’ll need to provide proper documentation showing that the income is expected to continue (and for how long).
Can I get a “no-income verification” loan?
Probably not. Although “no-income verification” loans were more common in years past, most lenders today require evidence of substantial liquid assets in order to waive income requirements. Where they do exist, the terms are not advantageous to the borrower, and certainly nowhere near what traditional mortgages currently offer (rates well under 4 percent and no closing costs in many cases).
What if I’m self-employed?
If you’re self-employed, the lender will only consider your last two years’ self-employment profit/loss (shown on Schedule C of your tax return) to determine your income. Your adjusted gross income (AGI) is not considered. (Source: USAA Mortgage) If you’re on your own now but had a great job earlier in the year, the income from that job is totally irrelevant now. In most cases, the lender will not consider any income from past employment if you no longer have the job.
Some lenders will allow you to boost your self-employment income by adding back in depreciation, mileage and other line items that reduce your tax liability but don’t affect your monthly income and spending. (Source: CapWest Mortgage)
Your debt ratio is simply the percentage of your income that you spend on debt. Including your proposed new mortgage payment, your total debt expenses, including auto loans, credit cards, student loans and any other debt each month may not exceed 40 percent of your income (after taxes). For FHA loans, your mortgage payment may not exceed 31 percent of your monthly income, and your total debt may not exceed 43 percent.
To qualify for a loan, your credit score must be at least 600. To get the best rates, your score must be 740 or higher. The lender will also look for bankruptcies, late payments, judgments and foreclosures. Even after you’ve reestablished good credit, if any of these remain on your credit report they could cause your application to be denied.
Debt and debt limits
Some lenders caution that having too many open credit card accounts can hurt the applicant, because although you don’t have high balances today, you could potentially go out and charge up all of your cards next week and become unable to pay your mortgage. But other lenders say that they might simply ask you to close one or two accounts, or provide a letter of explanation as to why you have so many open credit cards. Having low debt relative to your available credit is one factor in determining a great credit score, so talk to a mortgage banker about your situation if you have multiple unused open accounts that you don’t want to close.
What it means for you
The requirements to qualify for a loan vary slightly from lender to lender, and each prospective borrower’s application is reviewed independently. If one lender declines to offer you a loan, consider talking to another. Here’s a checklist of questions to ask them, in addition to any questions about your particular circumstances. You’ll still need to prove that you are loan-worthy, but a smaller bank might be more willing to look closely at your situation and help you get the loan.
The bottom line is that the burden of proof is on you – you must convince the lender that you are a safe bet. Start by reducing your debt, making your payments on time, and building an emergency fund. Keep good records, especially when you pay off a debt or you have a new source of income. Then when you are ready to apply for your loan, gather all the necessary paperwork. The more documentation you can provide, the smoother the application process will be.
Kimberly Rotter is a writer, businesswoman and mother in San Diego, CA. She holds a Bachelor’s degree in English, a Master’s degree in Business Administration, and a Graduate Certificate in Distance Education. Kim and her husband own two homes, a couple of vehicles and a few investments, and live with minimal debt. Both are successfully self-employed, each in their own field.