Mortgage Loan Requirements

You must meet the qualifications before being approved for a home loan.new home for sale image by itsallgood from Fotolia.com

Homes can vary widely in price depending upon their size and location. If like most Americans, you cannot afford to pay cash for a new home yet wish to become a homeowner, you can finance your home purchase with a mortgage loan. Before you can qualify for a mortgage, however, you will need to meet your lender’s qualification requirements.

Credit Check

Your credit history plays a crucial role not only in your ability to qualify for financing on your own, but in determining your interest rate. Most mortgage lenders pull a particular type of credit score calculated by the Fair Isaac Corporation and known as a FICO score. A FICO score can range from 300 to 850 and shows your lender whether you pay your debts responsibly. A credit check also shows your lender if you carry any high-risk factors such as a previous bankruptcy (See Reference 1). You must grant your lender the right to pull your credit report and FICO scores before a mortgage underwriter can make a decision about your loan request.

Your mortgage lender will want evidence that you possess a steady source of income with which to make your monthly payments. Your lender will likely request copies of your pay stubs and a copy of your most recent tax return. Some lenders prefer that applicants to demonstrate that they have held their current jobs for a certain length of time. Doing so displays to lenders a degree of stability. Your income level also determines the amount you can borrow to finance your new home (See Reference 2).

Although a small number of mortgage loans, such as loans made through the Department of Veteran’s Affairs, do not require a down payment, most of them do (See Reference 3). A down payment can range from 3.5 percent of the total loan amount to 20 percent or higher, depending on the lender you choose. A down payment provides the lender with added security, since borrowers willing to put a significant amount of their own money into a home are less likely to abandon their repayment obligations (See Reference 4).

In addition to your down payment, your lender will also review your finances to ensure that you can afford to pay closing costs. These include various fees that arise from the loan transactions, such as a fee to check for a clear title and the mortgage lender’s fee for providing you with a loan. These costs are paid at closing and, according to Bankrate.com, often amount to three to five percent of the total amount you borrow (See Reference 5). In some cases, the home seller can contribute to the closing costs or you can have closing costs bundled into the loan itself – reducing the amount you must pay up front.