How to Qualify for a Home Mortgage Loan 

Are you considering applying for a mortgage loan to purchase your first home?  If so, you should read the following tips below that will make the process easier.  There are three components to qualifying for a mortgage.  They are: 1) Good Credit, 2) Down Payment, and 3) Adequate employment and income.

           A Good Credit History Makes It Easier To Qualify For a Mortgage 

By far the easiest way to qualify for a home mortgage loan is by establishing a good credit history.  To establish a good credit history you need to be able to demonstrate responsible repayment of smaller loans, such as credit cards and car loans.  The building of your credit history begins the day that you put the very first debt into your own name.  For many Americans, this is at the age of eighteen. 

Having a good solid credit history, shows the home mortgage lender that you take financial responsibility seriously.  This makes you, what the lender terms, a low risk borrower.  That is to say that you as a borrowers are a relatively low risk in comparison to other borrowers.  

In return for your good credit history, the lender will approve your home mortgage loan application.  In addition, he will offer you a lower interest rate on the loan than would be offered to other borrowers who are classified as higher risk.  

What is a good credit history.  It is at least three lines of credit history on your Credit Report.  These may be credit cards or installment loans.  Alternate credit in the form of rental payment history, utilities and/or phone payments and insurance payments can count as a payment history for some government loans.

Be sure to maintain a checking account and make your rent payments by check and on time.  You may have to provide copies of the last 12 months of checks to prove that you have paid your rent on time.

How Is Credit History Determined 

Most people do not realize how pervasive and thorough the industry that accumulates and tracks individual credit histories is.  There are three major credit repositories.  They are:  Experian, Equifax and Transunion.  Among these three, they have a history on almost every person in the United States that has ever had a credit card, car, or mortgage loan.

A mortgage lender almost always orders a history from each of these repositories. This report is call a three bureau merged credit report or a tri-merged report.  The word merged means that the bureau's consolidate the individual trade items in the report and eliminate duplicate items. 

The lenders always order a credit score with the tri-merged report.  Each bureau has its own score and the general name for the score is called a FICO or Fair Isaac score.

Most lenders make their loan decision based on the middle of the three FICO scores.  Generally lenders use the following as guidelines for credit approval.

                        SCORE                                   RATING 

                         740+                                       Excellent

                        720 to 739                               Good 

                        680 to 719                               Average

                        620 to 679                               Fair

                        Below 620                               Subprime

                        Below 580                               Forget It

If your credit history is not as strong as you would like, that doesn’t mean that you will have to give up on getting a home mortgage loan.  There are other things that you can do to increase your chances for mortgage approval. 

Save a Sizeable Down Payment 

Having a substantial down payment on the home that you wish to purchase and applying for a smaller home mortgage loan is another way to increase your chances of getting mortgage approval.  Again, this goes back to the risk involved to the lender for financing your loan.  

Some mortgage lenders will require that you have a 20% down payment on the home, and then they will grant mortgage loan approval for the remaining 80% of the purchase cost.   This helps to offset the lender risk.  In the event that you are unable to keep up with monthly mortgage payments and you default on the loan, the lender will have a better chance of recovering his money through foreclosing on and selling the home if the loan is a smaller percentage of the market value of the home. 

Therefore, if you can save 20% or more towards a down payment on your home, you will be lowering the risk to the lender and increasing your chances of getting mortgage approval.  

Mortgage Insurance is used by lenders when you can not make a 20% down payment on your purchase.  The lender is the entity that is insured and borrower pays a monthly premium of as little as .3% of the loan amount to over 1%. (i.e. $200,000 loan has month premium of $50 at a .3% rate.) The amount of the insurance premium is determined by the amount of the down payment.  That is, the less the down payment, the higher the mortgage insurance premium. 

Another technique to minimize your down payment is to ask the seller of the property to carry back a second mortgage in lieu of receiving all the sale price in cash.  Your should talk to a Realtor or to a mortgage broker/banker about this technique as it is tricky. 

Many first time home buyers cannot afford 20% or even 10% down.  Government loans like FHA and VA require much smaller down payments.  You can get into a FHA loan for 3% down payment and VA has no down payment program.  Some FHA programs will also accept a gift from a non-profit corporation and this has been a very popular program in the past.  FHA is attempting to eliminate this program so it may not be available in the future.

Employment and Income

Income and employment is always calculated and verified for the past two years.   If you have jumped around on a number of jobs, a mortgage will be hard to come by. If you have changed career fields or have a long unemployment gap, that will also be scrutinized. Likewise, income derived from sales commissions or bonuses must be verified for the past two years and averaged.  Part time work must also be verified for the past two years.  Income ratios are computed and those general computations can be found in another section of this site IV. Qualifying Ratios.  in the How to Get a Mortgage button located on the home page.

You May Have To Accept a Higher Interest Rate on Your Mortgage Loan 

If you wish to secure a mortgage despite your bad credit history, and you do not have a sizeable down payment saved up, you may have to agree to a mortgage at a higher interest rate than that which is being offered to low risk borrowers.   This is because the lender will want to be compensated for his increased risk level.

This should not necessarily prevent you from taking the loan, though.  If you secure the mortgage and are diligent about making timely payments, after paying on it for awhile you will improve your credit history.  Then you may refinance the mortgage at a later date with a better rate offer.