How To Qualify For a Home Loan

What does a lender look at when determining qualifications for a home loan?

A mortgage lender looks at four areas to determine qualification for a borrower to obtain a mortgage loan to buy a home.

We refer to these as The FOUR C’s.  

The First C is for your Credit.
A lender will determine your willingness to pay your new mortgage by reviewing your credit history and credit score. This is done when your loan officer pulls a tri-merge credit report from the three credit bureaus of Transunion, Equifax, and Experian. Along with the credit history from the three bureaus, the credit report will also show your credit score created by the Fair Isaac Corporation. This is known as your FICO score. FICO scores range from 300-850. 

In 2020, the average FICO score in the US was 710.  A FICO score of 740 and above to get the best mortgage terms from your loan officer.

To request your credit report from the bureaus for free, go to: https://www.annualcreditreport.com/index.action

The Second C is for your Capacity.
A lender will determine your capacity, or ability to pay your mortgage, by reviewing your income and employment history. For most loans, a two-year history of employment is needed. A loan officer will review such documents as: recent paystubs, W2’s, 1099’s, and tax returns to establish your qualifying income. Your debts, those listed on your credit report, plus the new mortgage payment, are calculated to make sure you have enough income and that your new payment is within allowable debt to income ratios.

How much income do I need to buy a house?
https://www.cinchhomeloans.com/how-much-income-do-i-need-to-buy-a-house/

The Third C is for your Capital Contribution – or down payment.
Although some loan programs are available with no money down, many will require a down payment – or skin in the game from you the borrower. Some programs may even allow for the down payment to come as a gift from a family member or employer but most commonly the down payment will come from your savings.  A common myth is that a borrower needs to save 20% of the purchase price for the down payment, however, very stable and safe mortgage loans can be obtained with as little as 3%, 3.5%, or 5% down payment.

Find more information about down payment here:
https://www.cinchhomeloans.com/how-much-do-i-need-for-a-house-down-payment/
https://www.cinchhomeloans.com/what-is-the-average-down-payment-for-a-home/

The Fourth C is for the Collateral – or the property being lent on.
Your loan officer will review the property you’re looking to purchase.  This is usually done by ordering an appraisal . The purpose of the appraisal is to assure the lender that the quality and condition of the property meet the requirements of the loan. It is also used to insure the lender that the home is worth what you’re paying. This prevents you from owing more on your loan than the home is worth and better secures the lender’s interest in the mortgage on the property.

Get your home appraisal here:
https://www.cinchhomeloans.com/a-home-appraisal-checklist/

These are the four areas a lender will use to qualify you for a mortgage loan. Keep them in mind so you can qualify for a mortgage to buy your new home.

First-time homebuyer? Check out our first-time homebuyer checklist.
https://www.cinchhomeloans.com/first-time-homebuyers-checklist/