Home Loan Eligibility

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Home Loan Eligibility

Home loan eligibility - Man with quizzical look on his face surrounded by white question marks
Do you wonder if you can be approved for a home loan?

Are you worried about home loan eligibility?  Do you wonder if you can be preapproved for a home loan?  Wouldn’t it be nice if someone would tell you what lenders look for in a potential home buyer in order to prequalify them for a home loan?

Here are some of the main factors that lenders look for in a home loan candidate. There may be some variance from lender to lender, but generally speaking, these are the main things that will determine your home loan eligibility.  Not necessarily in order of importance.

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1. Credit Score    Lenders like to see a median credit score of 620 or higher.   They use the 3 main credit reporting agencies, Equifax, Trans Union, and Experian, find your score from each one, and take the middle score as the determining score.

Home loan eligibility - cartoon of credit-report
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This middle score has to be at least 620, and some lenders need to see a higher number before they will consider you for a home loan.

There are some exceptions where a lower score than 620 will be considered, but this is not a normal criteria, and if a lower score is considered, the other factors must be good.

2. No Bad Credit History   If you have had a foreclosure, repossession, or a Chapter 7 bankruptcy in the last 3 years, you will not be considered.  If you have had a short sale or a Chapter 13 bankruptcy in the last 2 years, you will not be considered.

Lenders also like to see stable employment, and credit history from the end of these issues to the current date, in order to be considered for a home loan.

Home loan eligibility - Workman with white overalls and brown hard hat on, hand drilling in to large piece of wood
Lenders want to see a stable work history.

3. Stable Work History   Lenders like to see a stable work history. They want to see that you have been on your full time job for at least the last years.

It may be permissible to have more than one job in the last 2 years, but it must be in the same industry, or type of work, and, the gap between jobs must be minimal.  Of course, lenders will need to see proof of income, usually based on tax statements, and/or tax returns.

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4. Debt to Income Ratio  To be considered for a home loan, lenders like to see a debt to income ratio that is low on the debt side, and high on the income side.

Some debt is ok, even preferred, but your income should be considerably higher than your debt. How much higher depends on the lender, but generally speaking your debt should not be more than 1/4 of your income.

A mix of debt, car loans, mortgages, credit cards, etc.,  is usually preferable, as this shows a longer credit history, and usually means that you pay back your debts.   Of course, the more income you have, the higher priced home you can qualify for.

The area where you live will help determine how much income you need in order to qualify, as home prices can vary greatly from city to city, and state to state.

Home loan eligibility - Young, Asian man holding up credit card.
Lenders want to see a pattern of on time payments.

5. Payment History  Your credit score will usually reflect your payment history, at least to some degree.  Lenders will delve deeper though, and find out how well you have paid back your debts, as this is a very important factor in the pre approval, and/or approval process.

If you show a pattern of on time payments, with few, if any, late, or missed payments, you will be on the inside track to your goal of qualifying for your loan.

6. Collateral   If you have additional assets such as cash reserves,  retirement accounts, stocks, bonds, precious metals, etc., this can go a long way in easing lenders concerns that you will pay back the mortgage that they provide you.

Although they can’t go after your assets in the event of a default, they know that if you have financial means beyond your income, you also have the ability to make good, if something happens to your income. These extra assets can be the difference, in many cases, of a yes, or a no, in the approval process.

If you can meet these criteria, good for you. You are on your way to being preapproved for a home loan, and ultimately approved.  If not, use these criteria as your guide, and strive to achieve them.

Also, a good lender will give you more details on how to improve your credit, and structure your finances, so you can qualify in the shortest possible time frame.

Your home loan eligibility is now in your hands.

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