There are few things that are more exciting than buying your first home.
When you buy a home, you get to have the pride of ownership. You can paint the walls whatever color you want, and or update hardware and appliances without having to consult a landlord.
Best of all, unlike rent, mortgage payments actually contribute to building personal equity. In fact, many finance experts consider home ownership the key to building wealth.
That said, while purchasing a home can be a great experience, it can also be a daunting process.
Buying a house is a huge investment. In fact, for many people, it will be the most expensive purchase they ever make in their life.
For this reason, most buyers cannot afford to buy a home in cash. Instead, they must apply for financing.
It can be very disheartening for would-be homeowners to get excited about a potential property, only to find that their mortgage application has been denied. The good news, however, is that there are often steps you can take to improve your home loan eligibility.
Let's take a look at how mortgage lenders determine your eligibility for a loan.
What is home loan eligibility?
Before we look at the factors that impact your home loan eligibility, let's take a moment to define what this term means.
Lending institutions make their profits off of the interest that borrowers pay when paying back their loans.
Whenever someone applies for a loan, the institution must decide how much money to lend that person. They also decide what interest rate to charge. They make these decisions based on how likely they believe the borrower is to make their payments on time.
Essentially, factors that lending institutions believe make you more or less likely to make your mortgage payments will impact your eligibility for a home loan.
So what are these factors? While there are several, let's take a look at six primary ones.
Age
One of the ways lending institutions determine a potential borrower's trustworthiness is by their age. Age can factor into a lender's decision in a few ways.
First, let's consider if a borrower is 50 years old, and looking to take out a 20-year mortgage. By the end of that loan term, the borrower would be 70 years old.
Before approving a loan, the lender would want to know when the borrower plans to retire. Additionally, they would want to see how the borrower plans to pay back the loan during retirement.
By contrast, folks who are further from retirement are considered to have more working years ahead of them.
At the same time, young borrowers present other risks to lenders. Lenders may question whether a young person is sufficiently responsible for making consistent loan payments.
In order to make this determination, the lender will typically weigh age against other factors.
Income and Profession
Monthly income is one of the best indicators of whether a borrower will be able to make loan payments. If a borrower does not have money coming in consistently, they may struggle to pay a mortgage.
In addition to your current income, lenders also look at your profession and job history. Borrowers who are in traditional professions are considered less risky because their jobs are in high demand and provide a consistent salary.
Additionally, lenders prefer borrowers who have been in the same job or industry for two or more years. These borrowers are viewed as more stable, and more likely to continue making their current salary.
So, even if a borrower currently makes a great salary by running a start-up company, lenders might view them as a risk. For one, the borrower's income could vary significantly month to month. Or, the business could fail, and the borrower could be out of work while looking for another job.
Credit score
Another factor affects home loan eligibility is the borrower's FICO Credit Score. Your credit score gives lenders an idea of your history of making loan payments on time.
If you are applying for conventional financing, a better credit score will get you a better interest rate on your loan.
If you are applying for a government-backed FHA loan, you'll likely need to meet a minimum credit score requirement. Once you meet that minimum, however, you typically won't qualify for a lower interest rate by having a great credit score.
Existing Debt
Even if you make your loan payments on time, however, your total amount of existing debt could negatively impact your home loan eligibility.
Your total amount of income compared to your monthly debt obligations is called your debt-to-income ratio. Typically, it is recommended that your debt-to-income ratio should not be higher that 45%.
Or, put differently, you should not spend more than 45% of your monthly income on debt payments.
If your mortgage payment would put you over this threshold, lenders may be hesitant to approve the loan.
Marital status
You've heard the expression "two heads are better than one."
Well, when it comes to home loan eligibility, two incomes are better than one. If you and your spouse both have solid incomes, lenders will view that positively.
Even if one of you loses your job, you will have the other spouse's income to fall back on.
That said, applying for a mortgage with a spouse can be a blessing or a curse. If your spouse has poor credit, for example, that could negatively impact you.
The condition of the property
Another factor that can affect home loan eligibility is the condition of the home itself.
If you apply for a loan on an older home with a lot of problems, it will be harder to get approved by a bank. That's because the bank sees the home as having a higher risk of becoming uninhabitable.
If you are no longer able to live in your home, but still owe money on it, that could put you in a difficult financial situation.
If you need help determining your home loan eligibility, contact us. Our mortgage lenders can work with you to find a financing option that will work for your situation.
AUTHOR BIO
Will Foster | First State Bank Mortgage Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.