How to Qualify for a Mortgage

​Qualifying for and obtaining a mortgage is the first hurdle the home buyers may face. The process is handled by mortgage professionals who will issue a pre-approval letter indicating the amount of the mortgage the homebuyers could qualify for. This is an important step when it comes to sending an offer on any property since most home sellers and their agents will not entertain offers without a pre-approval letter.

Buyers should familiarize themselves in advance with terms like Amortization, Fixed and Adjustable Rate Mortgage (ARM) and compare the rates along with monthly payments for 30 years, 20 years, and 15-year mortgages and choose the plan that will suit their long term goals. In the long run, this could save them tens of thousands of dollars during the life of the loan and remember; there’s no substitute for knowledge and preparation.

Homebuyers should be educated about the loan options including the rates and terms of the mortgage, which are always detrimental in obtaining the best loan. The knowledge of understanding and checking the financing details such as the downpayment options or PMI (Private Mortgage Insurance) with different mortgage lenders are some of the most important steps when applying for a mortgage and getting the best value afforded to them.

Documents Necessary for Obtaining a Mortgage

Having all the documents necessary for obtaining a mortgage ready in advance is a great help in expediting the mortgage process. The following list covers the majority of the documents the home buyers will need although different lenders may ask for additional supporting paperwork:

• W2 Forms for Past 2 Years

• Pay-Stubs (or other proofs if not receiving pay-stubs)

• Tax Returns for Past 2 Years

• List of Debts

• List of All Assets

• Profit and Loss Statements for Self-Employed

• Proof of Timely Payments for Renters

• Bankruptcy Documents (if applicable)

• Proof of Any Additional Income (such as divorce decree)

• Gift Letter (if applicable)

It is important to remember to update these documents if any changes to employment, income or debt occur. Lenders do not like surprises. We have had instances when the lender approved a loan and a few days prior to the closing pulled another credit report which resulted in the cancellation of the mortgage because the buyer signed up for a new leased car. This cancellation of the loan was simply due to the change in Debt/Income Ratio or as otherwise called the Obligations/Income Ratio.

Calculating Debt-to-Income Ratio

Home buyers should be aware of their Debt-to-Income Ratio before applying for a loan. This ratio along with the credit score are the two most important factors in the approval of a mortgage as well as obtaining the best interest rate. Sometimes, it is well worth the effort to pay-off or pay-down some of the debts in order to qualify for a mortgage. The ratio is consisting of only two factors; Income and Debt and the homebuyers could either try to decrease their debt obligation or increase their income, which the later may be more difficult than lowering the debt.

To calculate the Debt-to-Income Ratio simply divide all debts by your income. For example, if the total monthly debts are $2,000 and your monthly income is $5,000, the Ratio is 40%. Although the Ratio may vary by each lender the rule of thumbs for an acceptable ratio should be less than 36%. That said, the government-backed mortgages such as FHA have their own DTI ratios. The 2019 Debt-to-Income Ratios for FHA are 43% for total debt obligations and 31% for total housing payments.