Buying your first property is an exciting step. While you may have a good grasp of the general concept of a mortgage, there is a lot to learn about getting approved for a mortgage.
It can be tricky enough to find the right property. So, it’s best to take the time to fully understand what is involved in securing a mortgage and what lenders expect.
What affects mortgage eligibility?
Ultimately, when you apply for a mortgage, the lender has the task of determining your ability to repay the loan. To do this, they consider several factors. These factors include your income, job history and stability, assets, debt-to-income ratio, credit score, and the type of property you want to purchase.
Before they look at anything else, a mortgage lender will want to know about your income. You need to earn no specific amount to buy a particular property, as it only forms part of the calculations.
Lenders want to see a stable and secure income from a job they have been in for some time. The amount of time varies between lenders and depends on how long you have been in the industry.
As well as your primary income, lenders will want to know all details regarding your household income (should you be applying with another person). Lenders will also want to know about any other income you receive, including child support payments, alimony, dividends, etc.
Your debt-to-income ratio (DTI) is another tool used as a strong indicator of your ability to repay the proposed loan.
Calculate your DTI by adding together all of your minimum monthly debt repayments and dividing that total by your gross monthly income. The debts lenders will include in this calculation include any in which the repayments are recurring, such as student loans and vehicle loans, credit cards, etc.
Expenses such as groceries and streaming subscriptions won’t be included in the DTI calculation, as they come under other living expenses.
The ideal DTI that lenders are looking for varies. Typically, a DTI of around 50% or less is a standard threshold for a traditional mortgage, although government-backed and other specialty mortgages may differ.
The state of your credit score will make a big difference when it comes to your eligibility for a mortgage.
Having a high credit score gives lenders confidence that you are a responsible borrower who consistently repays their debts on time. Conversely, if you have a low credit score, lenders can see that you have a history of failing to repay your debts and will consider you a higher-risk borrower when underwriting your application.
Lenders want to know whether you own any significant assets. Assets possibly include:
- A vehicle.
- A share portfolio.
- Other taxable investments.
- Money keeps in a savings or retirement account.
These all add to your financial stability when deciding whether to grant you a mortgage.
Obtaining your first mortgage approval
Now that you have a clearer idea of what lenders are looking for, you can prepare the best application possible.
Prepare all documents needed for your application. If a lender has to chase you up for multiple missing documents, it can slow down the application process. As well as identification, the documents needed include:
- Your two most recent pay stubs and W-2s
- A minimum of two years’ federal tax forms
- 1099 forms, or, if you’re self-employed, your profit and loss statements
- Any documentation relating to child support, alimony payments, and any other secondary income you receive regularly
Documents and/or statements confirming any assets or savings held
Before applying for any loan, it is good to check your credit score.
If your credit score is low, do whatever you can to improve it before applying. Make a plan to repay outstanding debts where possible, and gather relevant documentation explaining any bad credit. For example, if a medical emergency caused you to miss a credit card payment or two, you can provide proof of this to the lender.
Once you have everything in order, it pays to get pre-qualified when getting approved for your first mortgage. Pre-qualified approval means that a lender has assessed your eligibility and can confirm that you will likely pass for a mortgage – subject to the final application process.
A pre-qual gives you the confidence to start house-hunting and a good idea of how much you are eligible to borrow. It can also speed up the time it takes for full approval once you find the right property.
Lenders consider many factors when deciding whether to approve a mortgage. The more prepared you are with healthy finances, good credit history, and a secure income, the smoother the process will be.