Your First Mortgage
There are three important factors when qualifying for a mortgage: credit, income and assets.
- First off, credit: borrowers ideally should have three open tradelines, preferably open for 12 months or longer, with no or very minimal late payments. For Federal Housing Administration (FHA) homes, as well as some conventional properties your credit scores should be at least 640.
Of course, the higher the score the better. Scores of at least 740 are best. For borrowers who do not have traditionally strong credit scores, there are options using non-traditional credit such as proof of steady rent payment, utility bills, and cell phone bills.
- Next, how you’re going to pay for your home, or income: The DTI, or debt-to-income ratio, is crucial. The DTI, expressed as a percentage, is calculated by dividing total monthly debt, including the new housing payment, minimum credit card payments, lease payments and student loan payments—anything on the credit report—by the monthly income.
It’s best that a borrower’s DTI should be 45% or less. Exceptions can be made for home borrowers whose DTI is as high as 50%, however this is not ideal. Also the estimated rental income on a multi-family home can be used—but not always.
- Finally, assets: Borrowers need to determine how much money they have available toward the purchase of the property. A conventional loan usually requires a down payment of at least 20% of the home price, as well as closing costs. For homes purchased through FHA, a 3.5% down payment plus closing costs is acceptable. For primary residences, you can use cash gifts from family members toward the down payment. All assets need to be sourced and verified using bank statements with explanations for all large deposits.
Here’s a rundown of documents you should gather before moving forward:
- 2 years of tax returns, with all applicable schedules
- 2 years of W2’s or 1099s, as applicable
- 2 months’ bank statements, all pages
- Social security number
- Government-issued photo identification