Your home may be the largest purchase you ever make. Deciding to buy a home is a big decision, so it’s essential to ensure it’s a thoughtful choice too. Taking the time to understand how qualifying for a mortgage loan works will help make the process as rewarding as exciting.
When you apply for your loan, mortgage lenders will look at a variety of information. But it ultimately comes down to these three things: your credit, income, and assets.
How Your Credit, Income, and Assets Work Together for Qualification
1. Your Credit
Lenders will review your history with a request to the three major credit bureaus TransUnion, Experian, and Equifax. The information they collect will help them make the most informed decision in the mortgage qualification process.
Alongside your credit report is a calculated credit score, also known as a FICO score. Your credit score can range anywhere from 300-850.
Lenders set their own standards for what scores they'll accept, but they generally consider your payback history, whether the payments were made on time, and if the loan was repaid in full.
Your credit score is a deciding factor with a mortgage qualification, and it also helps determine the interest rate that you receive. The higher your score, the easier it is to qualify for a mortgage.
Now that you have an understanding of credit, you may wonder how to improve your score. Consider both your credit score and the report the number comes from as well.
Look for errors or debt amounts listed that don’t belong to you. If you do find errors, take the time to contact the creditor and dispute them correctly. The creditor’s information is listed on the report for ease of reference.
2. Your Income
Next, your income also matters in the qualification process. Lenders will assess your debt-to-income (also known as DTI) ratio. Your DTI includes all of your current fixed expenses — expenses that are the same amount each month — in addition to the new mortgage.
These expenses are then assessed against your gross monthly income (before any taxes are deducted). This will help your lender determine whether you’d be spending less than the recommended 50% of your gross monthly income on those fixed expenses.
Varied expenses such as utilities, cable, or phones are not included in the DTI ratio. You can bookmark this as a quick reference for terms to know throughout the process.
3. Your Assets
Assets are also critical to the qualification process. Assets are items you own that have a monetary value. Therefore, any money you have in accounts that could be pulled out as cash should be listed as an asset.
Physical assets can be sold for funds to better qualify for a mortgage. These assets include, but are not limited to, items such as properties, homes, cars, boats, RVs, jewelry, and artwork.
The lender may also inquire about your liquid assets. For example, they’ll want to verify the amount you’ll be using for the down payment is accessible in a liquid cash account, such as a checking or savings account.
Also, depending on the type of financing you’re seeking, there could be a requirement to have a steady cash reserve. Reserves differ from assets because a reserve is what you have leftover before making a down payment or paying any closing costs. These reserve requirements are more common when trying to purchase a second home or investing in a property.
Tying It Together — Know Your Loan Types
We discussed the importance of your FICO score earlier, but it’s helpful to note that some mortgage loan types have flexibility in scoring qualifications.
A conventional loan is a mortgage not funded by a government agency. Most conventional loans are backed by mortgage companies Fannie Mae and Freddie Mac. An average minimum FICO score of 620 is typically recommended when applying for a conventional loan, but lenders always make their own determination on this.
VA loans are guaranteed by the U.S. Department of Veterans Affairs. They’re meant for veterans, active-duty military members, and eligible surviving spouses. The VA doesn’t set a minimum credit score for these loans, and lenders can develop their own requirements.
Mortgages backed by the Federal Housing Administration (FHA) are designed for first-time home buyers and low-to-moderate income borrowers. These loans require smaller down payments than other types of mortgages.
The U.S. Department of Housing and Urban Development says you may qualify for an FHA loan with a credit score of 500 as long as you put down at least 10%. With a higher FICO credit score—at least 580—you may qualify with a down payment as low as 3.5%.
Greater Texas Credit Union Mortgage Loans
At Greater Texas Credit Union, our team is ready to help you choose a mortgage loan to fit your needs. We understand qualifying for a mortgage is a unique process. And it looks different for everyone considering credit, assets, and income can vary.
Click below to learn more about getting a mortgage loan from a Credit Union. Or let us know if you have questions. We are always here to help!