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How To Qualify For A Mortgage

Before pouring hours into browsing Zillow it makes sense to figure out what kind of mortgage you can qualify for. Knowing this will also allow you to go more aggressively after a property when you find one you love.

In this guide, we'll break down the requirements for qualifying for a mortgage and how to increase your chances of getting approved.



When you apply for a mortgage, lenders will take a look at your credit score, income, and debt-to-income ratio (DTI) to determine if you're a good candidate for a loan.


How Much of Your Income Should Be Going Towards Mortgage Payments

One common rule of thumb is that your total mortgage payment (including principal, interest, taxes, and insurance, also known as PITI) should be no more than 28% of your gross monthly income.


For example:

Gross monthly income = $10,000

Multiplied x 28%

Qualifies for a $2,800 mortgage payment


However, some lenders may allow for a higher percentage, depending on your credit score and DTI... so let's look at DTI.


Debt-To-Income (DTI) Ratio

Often a bank will allow your total PITI to be higher than 28% as long as your debt-to-income ratio is 43% or lower.


For example:

Gross monthly income = $10,000

Current monthly debt (car payments, credit card payments, student loans, etc.) = $800

DTI of 43% means the borrowers total payments should be $4,300 or less

Subtract the $800 in current debt and (s)he qualifies for a $3,500 mortgage payment


While lenders typically want to see a DTI of 43% or less, some may accept higher ratios depending on the circumstances. A larger down payment on a house means a smaller mortgage payment, so if it's an option this is one way to squeeze into the required DTI ratio.


And it's worth noting, there are also some awesome programs out there for first time home buyers that have more lenient guidelines and/or lower interest rates than are commonly offered in the market.


Credit Score

Lenders typically require a minimum credit score of 620 to qualify for a conventional loan, although some may accept scores as low as 580. The higher your credit score, the better interest rate you'll qualify for.


How to Boost Your Credit

Credit agencies don't disclose exactly how credit scores are calculated, but there are some things we do know. If wanting to maximize your credit score (which could get you lower interest rates and mortgage payments) the following should give you a boost:

  1. Keep your credit card balances low. (Or get them low now, if possible.) High balances can indicate that you're overextended and may struggle to make payments.

  2. Limit new credit applications. Every time you apply for credit, it creates what is known as a hard inquiry on your credit report, which can lower your score a bit. So try to not have too many hard inquiries in the 6-12 month period before applying for a mortgage.

  3. Use a mix of credit types. Having a mix of credit types, such as a mortgage, a car loan, and credit cards, shows you can handle different types of credit responsibly.

  4. Keep old credit accounts open. The length of your credit history is a factor in your credit score, so keeping old accounts open can help boost your score. That said, it's rumored that if a person has more than about 5 credit cards it may begin to negatively affect their credit, even if they don't have balances on them. It's just seen as a liability. And it's definitely seen as a liability if someone has too large of a credit line. For example, if a person earning $100k/year has a bunch of credit cards with a total approved credit line on those cards of $300k, credit agencies will see it as a risk even if the cards have a $0 balance.

  5. Be aware of your credit utilization. The ratio of credit used to credit available is a key factor in credit score calculation. Keep it below 30%. In other words, if someone has a $3,000 credit card the balance should be below $1,000 or it'll begin to negatively affect their credit.

  6. Monitor your credit regularly. Keep track of your credit score and report to detect any suspicious activity or errors. Each person is entitled to 1 free credit report per year from each of the major credit bureaus. You can make those requests through annualcreditreport.com. And if you want to keep a constant eye on your credit and you don't subscribe to a credit monitoring service, then you might consider just staggering your requests and getting 1 credit report every 4 months from a different credit bureau. (Sweet hack!)

  7. Dispute any errors on your credit report. If you find any errors on your credit report, dispute them with the credit bureau and the creditor to have them corrected.

  8. Consider a credit-builder loan. These types of loans can help establish a credit history or build credit for those who have limited credit history.


Conclusion

Now you know what mortgage lenders are looking for, and have a few ways to boost your credit score. Once your ducks are in a row it makes sense to get pre-qualified (by a bank or a mortgage broker) so that you can pull the trigger on a place if the right one pops up.

And if you want to super-charge your home search and get a bunch of analytics on homes that you're interested in, give Quigley & Pumpernickel a jingle. We'll help make your home dreams come true.

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