How to Qualify for a Great Mortgage

Owning a home? Fun. (At least when you’re not mowing the lawn and arguing with problem neighbors). 

Shopping for a home? Even more fun and open-house charcuterie. 

Buying a home for the first time? When you’re a first-time buyer? Gah. It’s a nightmare. Not only is it likely to be the biggest purchase of your life, but unless you’re one of the lucky few who can afford to pay cash up front, you’re going to need a mortgage. And, ideally, you want a great mortgage with low interest rates.

In this blog post, we’ll break down what most lenders use to determine your mortgage. 

What is the Minimum Credit Score Required for Buying a Home?

While there are dozens of credit scoring methods a lender could use, most rely on the FICO® method when calculating your score. Credit.com reports that the minimum FICO® credit score lenders look for is around 620.

All lenders are different—even similar types of lenders may offer you different loans. This means that each lender will have a different credit score minimum when evaluating your application for a mortgage. 

In addition to your credit score, lenders also consider your repayment history. Any foreclosures, bankruptcy or late payments on your credit report will be red flags to a lender. 

Generally, conventional lenders (banks, credit unions and private mortgage lenders) require a higher credit score. Non-conventional lenders may take other factors into account—like your recent credit history or your debt utilization ratio—when evaluating your application. In other words, if your score is less than ideal, you’ll have better odds working with a non-conventional lender. For example, the Neighborhood Assistance Corporation of America (NACA) is a nonprofit that helps potential homebuyers with poor credit history qualify for mortgages with better rates.

How Much Can You Put Down?

According to the National Association of Realtors, the average down payment in 2019 was 12%. However, if you’re competing with other buyers a larger down payment will help you stand out.

How large of a down payment you need to make will depend on a few things: how competitive your particular housing market is, your credit score, the price of the property and your loan.  

The average down payment in San Francisco, a highly competitive, low-inventory area, far exceeds the national average at $250,000—roughly 20%. Yikes.

Although many lenders will require borrowers to acquire Private Mortgage Assurance on a mortgage with less than a 20% down payment.

Annual Income to House Price Ratio

Lenders look at the ratio of your annual income compared to the price of the house when calculating your mortgage. Generally, the goal is to purchase a house equal to three times your annual income. Lenders want to see that you’ll be able to consistently make payments—which is why many of them also consider whether or not you have been employed at the same location for at least two years.

Although the housing market is showing signs of cooling down, as of right now the average price of a home in the U.S. is more than three times the average income. NPR reporter Camilla Domonoske stated that “In recent years, in the U.S. as a whole, home sales have been increasing, and housing prices have been rising more quickly than incomes.”

Your Debt-to-Income Ratio

The amount of existing debt you have will impact your mortgage rates. If this is an issue you’re dealing with personally, you’re not alone—according to Zillow’s Consumer Housing Trends Report of 2019, 58% of all buyers with debt reported that they were worried about qualifying for a loan. (58%! That’s literally more than half!).

Having a low debt-to-income ratio will let your lender know that you can responsibly pay off your debts and that you have the funds to manage your mortgage payments.

What to Do if You’re Offered a Bad Mortgage or Denied Altogether

Being denied for a loan sucks, unfortunately, it’s not all that uncommon. The Federal Bureau of Consumer Financial Protection reported that 1 out of 9 applicants were denied for a mortgage on a new home in 2018. 

If you’re denied for a loan, here are some steps you can take:

Take Some Time to Work on Yourself

If you were denied for a loan, the notification of your denial will detail why you were denied. It may be that your debt-to-income ratio was too high, you didn’t have enough for a down payment or your credit score was too low. If you have the time, work on yourself to become a more attractive applicant before applying again. You want to look amazing on paper.

Try a Different Lender

Heads up: each loan application means a hard inquiry on your credit, and multiple hard credit inquiries within a short span of time will hurt your credit score. 

If you are initially denied for a loan, you could find another lender but be careful about submitting too many applications.

Like we said above, not all lenders are the same. The factors that determine your mortgage with a bank, credit union or a private mortgage lender will be different from those that determine your loan from a nonprofit or a government agency. The Consumer Finance Protection Bureau recommends talking to at least three different lenders before deciding on a loan.

Getting a Great Mortgage in 2020

Qualifying for a great mortgage can be difficult, but it’s not impossible. According to Zillow, 45% of people who bought homes in 2019 were first-time purchasers. 

At the time that we’re writing this article, mortgage rates are also the lowest they have ever been. And although average home prices are still rising, mortgage rates have remained fairly consistent.

There are local resources available—especially if you’re a first-time buyer—to help you secure a good mortgage or afford a steep down payment. Research to see if your state offers resources for prospective homebuyers. But above all else, don’t be afraid to take your time. The last thing you want is to rush into a bad financial situation or take on a mortgage you can’t afford.