How to Qualify for a Loan When Buying a Home

Seeking to qualify for a loan when buying a home can be an intimidating journey, rife with numbers and terminology that are not always easily understood. There is no reason to give up on your dream of buying a home, simply due to your perceived inability to receive a loan. The truth is that, to qualify for a loan when buying a home, you must meet certain requirements. However, it isn’t at all impossible to achieve your goal of home ownership, especially with some preparation and patience.

What Lenders Evaluate

When evaluating a loan for qualification, there are four main things mortgage lenders examine.

1. Employment history. In order to qualify for a loan when buying a home, you must have a consistent work history, with at least two years at your current position or at least in the same industry. This will be verified by tax returns, W-2′s, and paystubs, among other things.
2. Assets and other finances. Mortgage lenders also examine other sources of income, if any, as well as retirement accounts, savings and checking accounts, and personal assets that may serve as collateral. Proof of other income will most likely be requested.
3. Credit worthiness. To qualify for a loan when buying a home, a buyer must have what is considered a good credit score—anything above 660 is considered acceptable. The ideal loan candidate will show a consistent history of timely payments, particularly on high-interest loans.
4. Information about the home being purchased. If you have already started the process of buying a home, your lender will want to know as much information as possible about the home you are trying to purchase, in order to assess loan worthiness. They will pay particular attention to issues such as the condition of the home, location, inspection results and appraised values. If you are seeking pre-approval, this information is not necessary.

Preparing Ahead

Beginning the process of qualifying for a    home loan is only difficult if you do not prepare accordingly. To increase the likelihood you will be approved for a loan, follow these suggestions:

• Employment is one of the most important factors because it shows stability, something lenders like to see in loan applicants. However, do not be discouraged if you have not been at the same job for two years. Depending on the situation, that may not necessarily matter, as long as you are in the same industry, and especially if you have changed jobs due to a promotion or an increase in salary.
• Monitoring your credit score is essential to securing a mortgage loan, so if you are not planning on buying a home in the foreseeable future, now is the time to become familiar with your credit report. You are entitled to one free credit report per year from each of the three major credit reporting agencies—Equifax, Experian and TransUnion. Improving your credit score by challenging and correcting errors, settling debt and making consistent payments is the best way to ensure your score is adequate for a home buying loan.
• Save up a substantial down payment amount—between 15 percent and 20 percent of the amount you wish to pay for a house. Lenders see borrowers who have a larger down payment as less of a risk, because they are borrowing less money. If you do not have money for a down payment, there are many programs that will help with the purchase of a home, particularly for those who are first-time homeowners.
• Lenders gauge your ability to pay back a loan, in part, based on your income. They take a look at your monthly costs versus your asset values to gauge whether you will be able to repay the loan. One way to determine that is if your income is two to three times higher than what your mortgage payment would be. Keep that in mind when applying for a loan.
• Finally, be sure to always have copies of your tax returns and income information for verification purposes.  The more information lenders are able to review on the spot, the better chance you will have of being approved for a loan.