5 Critical Things You Need to Know About Qualifying for a Home Loan

By Chika

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Last Updated: September 25, 2021

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Buying a home is one of the biggest financial decisions most people ever make.

It is an important milestone achievement in life and sets us on the path towards financial independence.

However, not everyone has the financial wherewithal to pay for a home outright. Most people need to take out a loan to purchase their dream home.

There are a plethora of institutions that can offer mortgages to prospective home buyers. However, they all have requirements such as credit scores, payment history, etc. to determine if you are eligible for a loan.

So how can one meet these requirements and qualify for a home loan? 

Here are some factors that come into play when lenders are considering you for a home loan.

 

5 Factors Lenders Consider Before You Qualify for a Home Loan

1. Your debt-to-income ratio

One of the things lenders take into consideration is your Debt-to-Income Ratio (DTI).

This is the ratio that compares how much you owe each month to how much you earn in percentage terms.

A high DTI ratio indicates that you are using most of your income to service debts. This means that you are bordering on financial collapse.

Ideally, lenders prefer a DTI lower than 36%, though some lenders accept a DTI ratio as high as 43% can still get one qualified for a mortgage. You can calculate your DTI ratio by dividing your total debt by your gross monthly income.

2. Credit score

A credit score is a number between 300–850 used to evaluate the creditworthiness of a client.

This is the most commonly used metric used by lenders to assess the risk of a borrower.

A Credit score details your:

  • payment history
  • how much debt you have taken
  • number of accounts, etc.

It also shows your financial history such as outstanding debts, bankruptcies, etc.

The higher the credit score, the higher the possibility of obtaining a home loan. Plus, a higher credit score also means lower interest rates would be paid on the loan. Most lenders require a credit score of 620 to get a mortgage.

3. Show proof of income and employment

Most lenders would like to ascertain that you can pay the loan on a consistent basis.

One of the ways they do this is by verifying how much you earn and your employment status. This is why you are required to show proof of income and employment when applying for mortgages.

Lenders require applicants to show that they have a stable full-time job and must be employed for at least two years. Any gaps in between would have to be explained. If you are self-employed you would need to show tax returns, profit and loss statements, and other similar documents as proof of income.

4. Property type

The probability of getting a home loan is also dependent on the type of property you want to buy.

Property determines the amount of loan and how much you would be expected to churn out monthly to service loan payments. For example, you would need to have a higher credit score and would have to churn out more cash for the down payment if you want to buy a secondary or investment property because they are considered riskier.

In the same vein, getting a loan for a primary residence is easier than getting one for a secondary or investment property. This is because primary residences are homes which people want to live in, and as such are less risky for lenders.

5. Assets

Not all scenarios can be envisaged.

In life, we may run into unforeseen circumstances that would affect our finances. Lenders would like to make sure that in the case of any eventuality, you would still be able to meet up with your mortgage obligations.

One way they use to access this risk is by ascertaining if you have assets – things that you possess that have value and can be liquidated during an emergency. These assets may include:

  • stocks
  • real estate
  • jewelry
  • contributions in retirement accounts, etc.

 

Final word

Owning a home is the dream of everyone, but rising costs are putting homes beyond the reach of ordinary people.

One way people can use to achieve this important milestone is by taking up loans which would be spread for long periods (as much as 30 years). 

However, the lenders themselves want to know if they would get their money back and interests accrued. As such, they resort to a number of metrics to evaluate your eligibility and creditworthiness. 

A knowledge of these metrics can help you position yourself better so that you can qualify for the loan that you deserve. If you have a steady job, valuable assets and keep your eye on your credit score and  DTI ratio, then you can turn your dream into a reality!

Photo by Any Lane from Pexels

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