The Basics of Home Loans

There Are Home Loans For Your Credit And Income

Learn about what your lender is looking for when they are evaluating your credit and income. The answers might surprise you!


Introduction
Congratulations, you've decided to buy a home! You're probably already spinning your wheels to figure out how much you can spend on a house, what your monthly payment will be, and whether or not the bank will even approve you for a mortgage. One thing that institutional lenders—whether it's a bank or credit union—will look at is your credit score. Your credit score is basically a measure of how risky it would be to lend you money and then have you pay them back. On the other end of the spectrum is income requirements: lenders need to know how much money you make before they give you any more than that in mortgage debt. We'll talk about average credit scores below as well as average ratios of debt-to-income (DTI).
 
How much will my home loan be?
You may have heard that your credit score is important when buying a home. It's true! Your credit score will affect the interest rate you pay on your mortgage and how much of a down payment you'll need to make to get approved for it. The good news is that there are many ways you can improve your credit score before applying for a home loan so that you can get better rates, more favorable terms, and lower down payments.
 
The first step in calculating how much house you can afford is knowing where you stand financially and how much money it would take for your monthly mortgage payment. Your lender will need to know this information, along with information about all of the other debts (student loans, car payments) that you have outstanding at the time of application so that they can create an accurate debt-to-income ratio (DTI). This calculation helps determine whether or not the lender feels comfortable approving such a large sum of money based on what they know about your income level compared with what's actually being spent every month on necessary expenses like groceries or rent/mortgage payment(s).
 
How much debt do I have to how much income?
Your debt-to-income ratio, or DTI, is a measure of your overall financial health. It's the ratio of your total monthly debt payments to your gross monthly income (or the amount of money you make before taxes). The higher your DTI, the more financial risk you pose to a lender.
 
The "right" DTI varies based on factors including how much down payment you have and where you live—a smaller down payment and/or low-cost areas require larger DTIs. For most loans, however, a good rule of thumb is that your total monthly debt payments shouldn't be more than 28% of your gross monthly income; if they are higher than this threshold—known as being "overcommitted"—you're at greater risk for defaulting on your mortgage.
 
Does the ratio of my assets vs. income matter for a mortgage?
A loan-to-value ratio is a term used in the mortgage industry to describe the relationship between the amount of money you borrow and what you're buying. For example, if your home costs $200,000 and you want to buy it with a mortgage for $150,000, then your loan-to-value ratio would be 75%.
 
The difference between an asset and income is that assets are things of value that you own or have access to through collateral (e.g., car or property), while income is earned from work or investments. While many lenders look at both when deciding whether or not they'll give someone a mortgage based on their credit score and debt-to-income ratio (DTI), some may only consider assets when making this decision.
What is the average credit score?
 
If your credit score is in the range of 600 to 850, you most likely have a good credit score. If your score is lower than that, it's not ideal but it doesn't mean you can't get a mortgage.
 
How does credit score affect mortgages?
Your credit score, or FICO score, is a number between 300 and 850. The higher the number, the better your credit rating. The lower it goes, the more likely you are to be denied for loans—or get charged interest rates that are higher than those of other people with similar incomes and debt levels.
 
If you have good credit, lenders will assume that they can trust you to pay back your loan on time—and at the right amount—so they’re willing to lend you money at lower interest rates than if they thought there was a risk of defaulting on their loans.
Employment requirements for mortgage.
 
You'll need to be employed for at least two years with the same employer. You may also be required to be employed for at least two years with the same employer who is not a family member.
 
How long do you need to be employed to get a mortgage?
The next question to ask is how long you need to be employed. To get a mortgage, the lender wants to make sure that you are going to be employed for at least 2 years. If you are self-employed, we will want to see that your business has been open for at least 2 years and that it's profitable. You can also qualify if you've been self-employed for at least 1 year (with a letter from your accountant).
 
Does job security matter when getting a mortgage?
You might be surprised to learn that your job security can actually impact the amount of money you are able to borrow. This is because lenders look at your income stability and credit history when determining how much they want to lend you. If you have a high-paying job but it's not guaranteed, the lender will still consider that when determining whether or not they want to offer you a mortgage.
 
Your employment status can also affect whether or not you're eligible for certain types of loans, including:
  • FHA loans (which often have lower down payments than conventional mortgages)
  • VA loans (often available for those who have served in the military)
Income Requirements for Mortgage.
The minimum income requirements for mortgages vary by lender, but they are generally based on the size of the loan and the loan-to-value ratio. Lenders also consider your credit score and other factors, such as whether you have been late on payments in the past.
 
For conventional loans, the minimum gross monthly income required is usually about 2 times your monthly housing payment. When you apply for a mortgage, lenders evaluate your overall income to determine if it's enough to support making payments on both a home and other expenses like credit cards or student loans.
 
For FHA loans (which are insured by HUD), lenders must approve borrowers who make up to 38 percent of their annual income toward housing costs; that means someone who earns $50k per year would be able to afford an $180k house (40% x 180 = 85k) with 20% down ($85k). For example:
 
  • If you earn $50K per year but want 20% down payment ($20K) then this would put you at 140K (140K - 20K = 120K). So we need at least 120K/$1M+ which comes out to 10%. This means my required qualifying ratio is 10% (120/120).
Does steady income matter when applying for a mortgage?
You don’t need to be making a lot of money to get a mortgage. What matters is that your income is stable and predictable, that you can afford the mortgage payments and other costs associated with owning a home, and that you have enough equity in your current home (or savings) to cover closing costs on the new property.
 
The lender will look at your income history for the past two years when determining if you have enough money coming in on a monthly basis to make payments on time each month. This is called qualifying based on “verified income” or “total monthly debt-to-income ratio (MTD).
 
Can someone who is paid commissions get a home loan?
A commission-based job is a great source of income. However, it's important to consider the other sources of income you have on hand when determining your debt-to-income ratio. You may have other sources of income that you can use to qualify for a home loan. These include:
  • Sales commissions or bonuses
  • Capital gains from investments (like stocks)
If you've been working in the same industry and with the same employer for some time, this can help demonstrate stability in your employment history as well as your ability to pay back any loans taken out against your home. The longer you've been at an organization or location, the better—it shows that there's no reason for them not to keep paying you!

Conclusion
Now that you know the credit requirements for a home loan, it’s time to start thinking about what kind of mortgage is best for you. If your credit score is above 600 and your debt-to-income ratio is reasonable, then you’re in good shape! Mortgage lenders will look at other factors, like how long you’ve been working and how much money you earn before making their decision. But if those two things are in order then everything should go smoothly.
 
So go ahead and contact a few different lenders today—good luck on your journey towards home ownership!
 
 

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