Money Matters – 5 Factors That Impact Your Eligibility for a Home Loan | When buying a home, most people need to secure financing. While each lender has its own set of criteria for a loan, most have common requirements for all potential borrowers. If you’re looking to secure a home loan, you must meet these requirements before a lender will give you thousands of dollars to fulfill your dream. Below, we’ve listed several of the key factors that impact your eligibility.
- Credit Score
When you apply for a loan, one of the first things a lender will do is check your credit score. The higher the score, the more likely you are to be approved for the loan and get a lower interest rate. With that said, however, each type of loan comes with its own credit score limitations. For a complete rundown and explanation of these requirements, you may want to seek property investment advice from a professional to fully understand the impact your credit score has on home loan eligibility.
In general, though, to qualify for a conventional mortgage, you’ll need a credit score of 750 or higher. FHA and VA loans may be laxer in their credit score requirements with some borrowers being approved with scores as low as 500.
- Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is the amount of debt you have in relation to the amount of income you have. For example, if all your debt (including car loans, mortgage, credit cards, and student loans) added up to $1,500 a month and your income was $5,000 a month, your DTI would be $1,500/$5,000 or 3%.
Most lenders don’t like to see a DTI of more than 43 percent. In some cases, however, lenders will cap the DTI requirements at 36 percent. Each lender and loan type has different DTI requirements, but ideally, the less debt you have, the better you’re likely to fare when trying to qualify for a home loan.
- Down Payment
You can expect to make a down payment of some amount when you purchase a home. Most conventional loans have a 20% down payment requirement, but many borrowers end up putting down far less. In some cases, paying less than 20% means you’ll need to pay private mortgage insurance (PMI) each month until you’ve paid down your loan to less than 80 percent of what the home is worth.
Again, FHA and VA loans are more laid back in terms of down payment requirements. You may not even need a down payment at all if you qualify for one of these home loans.
- Work History
Regardless of the type of mortgage you qualify for, you’ll need to provide proof of income. Most lenders like to see that you’ve had a consistent income or work history of two years or more with an employer. If you don’t have an employer, you’ll have to provide proof of income from some other source such as disability benefits.
- Home Value
The home you’re looking to buy must be worth enough to justify the amount you want to borrow. You’ll need to get an inspection and an appraisal done to determine the value and condition of the home before a lender will approve. If the home is in poor condition or isn’t worth what you want to borrow, the lender may reject your loan.
While these factors commonly impact your overall eligibility for a home loan, each lender is different, so be sure to shop around to get the best mortgage for your situation.