Mortgage Basics - Qualifying for a Loan
First time home buyers often don't know where to start when thinking about how much house they can afford and how to qualify for a loan. A loan officer will work with you to figure this out, but if you want an easy primer on the basics to help you understand, keep reading...
1. Work history: Two years currently in the same career. You can have had multiple jobs over the last two years but needs to be within the same career field. And no significant gaps in employment. So, been a restaurant manager at a couple different places over the last two years, but same line of work; you're looking good. Been a restaurant manager, author, goat herder, and yoga instructor over the last two years; not so much.
2. Income: estimate roughly 1/3 of your monthly gross income for monthly mortgage expenses including taxes and insurance (and HOA dues, if applicable). That is not meant to be a quote of Fannie Mae guidelines - it is just a ballpark figure that would probably fit most loan conventional loan programs. Lenders also look at total credit debt, and all monthly credit payments (credit cards, car payment, loans) including the mortgage expense you are thinking about taking on will be limited to around 40% of your gross monthly income. Make $3,900 gross income monthly? You can swing about $1300/month for your monthly mortgage payment. How much of a loan does $1300/month get you? Try using a mortgage calculator. I like this one from Zillow: Mortgage Calculator. Remember that interest rates vary constantly and you need a loan officer to quote you a rate.
3. Credit: This is really where the loan officer comes in. You need a current credit report and they will get you one. There are different types or credit reports created for different uses and different audiences. The credit report you get by going to one of the big 3 bureaus and ordering your own is not the same as a tri-merge created for lenders. Some reports have variances in how they score and you need the right report for the right application. Now with that said, a score in the mid-upper 600s is where lenders typically will start approving loan applications. The better the credit score, the lower your interest rate will be and the lower your payment will be.
There are certainly other factors that come into play when figuring out how much house you can buy, including type of loan and amount of down payment. But for a general sense of what a lender is going to look at, work history, income, and credit are fundamental.
