Would I qualify for a home loan is a reasonable question with an easy-to-find answer. Finding out how much you can qualify for is a bit harder.
Here are the 5 questions you need to answer to know.
- Do you have reliable provable income? Reliable means no large unemployment gaps (unless they are reasonable, like maternity leave or going to school). Provable means you have pay stubs, W2’s and tax returns.
2. Do you have credit? This means, do you have credit cards or loans that are reported to the credit bureaus?
3 (a) If yes, do you have at least one line of credit that’s 2 years or older or 2 lines that are each at least year long?
3 (b) If no, do you have utility or phone bills that you’ve been paying on time for at least 12 months? (And proof of timely payments.)
4. Have you been late on any payments? (Being late does not automatically disqualify you from all home loans; being late a lot does. You can even be late on a mortgage once in 12 months and there still are programs available to you.)
All the above are answered and proven by your credit report. Your credit report will also have your scores, which are an important factor in determining how much do you qualify for.
Notice I did not bring up foreclosures, bankruptcies, deeds-in-lieu and loan modifications. I did not do it because there are lenders that will give you a home loan if you had such things yesterday. But at high interest rates.
If you want good(ish) interest rates, and I hope you do, having none of those recently is key. Recently means 2 or 3 years, depending on which one you’re talking about.
5. Do I have enough money for the down payment? Enough is determined by two factors:
- Mortgage program. The lowest required is $0 but available to veterans and active military personnel; most people will have to have at least 3%, some or all of which can be offset by #3 below).
- Loan amount. This is just simple math. 3% of $100,000 is $3,000 but 3% of $200,000 is $6,000, and so on.
- Seller financing. Various programs allow for different amounts of seller concessions. Conventional loans that go by Fannie Mae’s rules allow up to 6% and all of it can be applied towards the down payment.
The money that leaves your pocket can be further reduced if you get a gift from a relative or close associate. Some programs allow it to be $0.
Can these assets be verified? This means, have the money been in your accounts for at least 2 months? If your bank or retirement account statements show them, you’re in.
Beyond Would I Qualify for a Home Loan
Once you’ve answered the Would I qualify for a home loan questions, there are 3 more questions you need a good answer to. Here they are:
When to Get Pre-Approved for a Home Loan?
Early is best. Getting pre-approved before you start looking for a house ensures that your offers are taken seriously. It also makes the application process faster. Faster is good because you don’t risk having to pay for rate-lock extensions or losing your rate.
Where to Get Pre-Approved for a Home Loan?
There are many, many options. It is best if you approach several companies. Especially if you do it at the same time (so you end up comparing apples to apples, when it comes to the best interest rate: rates change often).
If your financial and credit profile are good, banks and credit unions are your best bet. If not, mortgage brokers are.
What to Bring for Mortgage Pre-Approval Appointments
You get faster results if you have the following documents ready:
- Photo ID (driver’s license or state-issued ID’s)
- Bank statements for the previous 2 months (including blank pages)
- Your federal, personal tax returns for the previous 2 years (all schedules)
- Pay stubs for the previous 30 days
- W2’s for the previous 2 years
- Federal Tax returns for each company you own
For people who think they’ll need a government-backed mortgage:
- Social Security Card
- Alien card (your lender will need copies of the front and back of it) for legal residents
- ITIN card for DACA people.
- Visa or Employment Certificate for foreigners