The big number that everyone cars about is their credit score. It is an important number to the lender because they use this to determine how you have handled paying your bills in the past. However, this isn’t the only criteria used to determine if you qualify for a home loan. Along with your credit score, you should be aware of the following factors that lenders will also be reviewing.
Debt-to-Income Ratio
Along with your credit score, a lender will also look at how much money you make and how this compares to your current expenses. You will be viewed as a lesser risk if you earn a higher income. However, if you make a higher income but you also have a lot of high expenses. Typically, the lender likes to see a debt-to-income of 43% or lower. This includes the new mortgage payment that you are about to take on.
Employment History
For the purpose of determining income stability, a lender may decide to review your job history for the last 24 months. If you have a track record of being with the same company over the course of the last two years, this will be viewed as a positive, and you will be a lower risk in their eyes. If they see that you have job hopped a lot in the recent past, this could be grounds for denying you your application. However, this also could mean that you will just have a higher interest rate.
Down Payment and Savings
The amount of cash that you are able to muster for a down payment will have a significant impact on your mortgage interest rate. The idea is that the more money you have invested in your home, the chances of you walking away from it are smaller. By a rule of thumb, putting down 20% of your home’s purchase price will help you get a low-interest rate, though you can qualify with as little as 3% down—you will just have a higher interest rate.
Keep in mind that you should not be putting money aside just for the down payment. Don’t expect to drain all of your savings so you can get a lower interest rate. The lender also prefers you to have a chunk of savings to cover your first two monthly mortgage payments. In addition to the down payment and closing costs, keep this in mind as you gather the funds to pull the trigger. The lender likes to see this extra money saved because if for some reason you take a temporary hit on your income, you can still recover and make the mortgage payments for the next few months.
Length of the Loan Term
One final detail you can consider is the length of the loan. Although your monthly mortgage payment will be higher if you go with a shorter loan term, it also means that you will be out of debt faster. The lender views a shorter loan term positively because this reduces the odds of your income changing over the course of the loan. It is also beneficial to you because you will end up paying less interest over time. Consider these factors along with your credit score to make sure that you not only can qualify for a home loan but that you can also get the best interest rate possible.
