Beyond The Mortgage Calculator: Qualifying For a Home Loan

Beyond The Mortgage Calculator: Qualifying For a Home Loan

Wednesday, September 26th, 2012

Many people regard home ownership as an important part of the American Dream. Not only can owning a home mean that your children have a safe environment to grow up in, but it can also be a measure of your own life achievements.

But owning a home is also a major life event, representing one of the most significant and therefore stressful events that have ranked in the top five such events time and time again. Yet, despite the stress and frustration, would-be homeowners everywhere are willing to trade some stress for a space they can call their own.

What keeps many awake at night is whether or not they will be able to qualify for a mortgage. And the truth is that there is no one factor which determines your eligibility. Those who haven’t gone for a mortgage before may have unrealistic ideas about owning a home. For example, they may dream of owning a large home with an in-ground pool in a nice neighborhood.

But the first indicator of being able to get the kind of mortgage the scenario above requires is to think about whether or not you can afford it.

Your ability to comfortably manage your mortgage payments is key. Running your details through a mortgage calculator is the quickest way to see how much a home will cost you. If you find that there is little room for a mortgage unless you stretch your budget, then chances are that you won’t qualify, and if you do, will struggle with or could fail in making your payments.

The Two Numbers Lenders Consider

No matter which bank you decide to go with for your mortgage approval, two numbers will be reviewed: your gross monthly income, and your total debt payments.

The amount of your monthly mortgage payment shouldn’t exceed twenty-eight percent of your gross monthly income. This number includes mortgage-related amounts such as mortgage insurance, taxes and homeowners insurance.

The second number to be considered will be what you’re already paying for. Are you leasing a car, or do you have credit cards? These and any other long-term debts will be examined closely to ensure they don’t exceed 36% of your gross monthly income.

Different Mortgages, Different Numbers

The numbers above represent those considered when a conventional mortgage has been applied for. Other types of mortgages such as FHA will see debt limits that can surpass 40%, and a mortgage payment that doesn’t exceed 31% of your gross income.

Your Credit

Most would-be homeowners know that their credit will play a very important role in the decision to approve a mortgage loan. And this fact strikes fear into the hearts of many who are applying for their first mortgage, with no wonder, as a credit score that’s too low can be enough to result in a complete rejection of a mortgage application.

Your credit is so important to your ability to get a mortgage because it provides your lender with a picture of your financial trustworthiness. Have you been able to make your credit card payments on time, or have you been consistently late? While there may be circumstances surrounding your reasons for late payments, most lenders will assume that less-than-desirable credit equals low mortgage loan repayment possibility.

There is good news, as most lenders report that most consumers in the United States have good credit. And you may qualify for a mortgage even if you have missed one or two payments, as long as those missed payments were made in under 30 days of being late.

If your credit score is less than 650, there may be some work to do before re-approaching a lender for another attempt at getting a mortgage. This work could include boosting your score by paying your bills on time, as well as using other tactics that can help you reverse your bad record.

The Down Payment

Your credit score will go hand-in-hand with your down payment, as it determines what percentage you will put down on your new home. So if you have a credit score below the 650 mark but have still qualified for a mortgage, your lender will request that you put a minimum of 20% down on your loan. The better your credit score, the less of a percentage in down payment you will have to submit.

The status of your employment will also play a role. If you have proof of having had the same job for the last two years, it may be time to celebrate. But if you are self-employed, more details will be required and you may end up not being able to borrow as much from the bank as you initially thought.

Guest author Sam Stieler writes on a variety of topics, but is particularly well-versed on the home mortgage industry.  He is a frequent contributor at The IOU Calculator, a site dedicated to helping consumers identify what type of home mortgage they can afford.  You can also find .