In 2019, the median price of a house in the United States was about $319,000.
Can you afford that?
Considering that the vast majority of American workers are living paycheck to paycheck, it’s safe to say not many people can afford to buy a house in cash. The good news is mortgage exist for this reason. About 60 percent of homeowners in the country have a running mortgage.
If you’re looking to be a homeowner, you’re certainly looking to do so through a standard mortgage.
But will you qualify?
Having a job doesn’t necessarily mean lenders will be willing to give you a mortgage. Continue reading to learn the requirements for securing a standard mortgage.
But first off:
What Is a Standard Mortgage?
If you’ve never taken out a mortgage before, you’re probably thinking that a mortgage is a mortgage. Well, there several types of mortgages, but they are broadly broken down into two: conventional (standard) mortgage and government-backed mortgage.
A conventional mortgage is issued by private lenders. These loans don’t have any government guarantees.
On the other hand, government-backed mortgages, such as the FHA loan, VA loan, and USDA loan, are sponsored by the federal government.
Right off the bat, you can tell that it’s easier to secure a government-backed loan than a standard loan. Private lenders without government backing are exposed to greater risks, which means they have a higher qualification bar for their loans.
Now that you know what a standard mortgage is, let’s dive into what you’ll need to qualify for one.
A Reliable Source of Income
To secure any kind of loan, a lender must establish whether you have an income. This helps them know whether you’ll be able to repay the amount of money you’re borrowing.
When it comes to a mortgage, the standards are even higher. Because of the large amount of money at stake, you not only need an income, but also a reliable source of income.
If you’re in between jobs or don’t have a contract on your current job, no mortgage lender is going to do business with you. You need to have a long-term job, a steady income from investments such as rental property, or a solid business that’s pulling in good profits. Bear in mind this must be verifiable, so prepare your pay stubs, income statements, tax returns, and whatnot.
In addition to having an income, the level of income must be high enough for the amount of money you need to borrow. For example, if you’re planning to go in for a mortgage worth $200,000, you’re going to need a higher level of income than if you were looking for a $50,000 mortgage.
Fortunately, you’ve greater control over this. If your level of income doesn’t meet the threshold of a $200K loan, you just need to buy a cheaper house. This will lower your mortgage requirements, as far as the level of income is concerned.
Your Current Debt Status
Having a reliable source of income alone isn’t enough if you have lots of other debt obligations.
This is why lenders will look at your debt-to-income ratio.
If it’s too high, meaning much of income is going into repaying existing loans, a rejection might be in the offing. But if you have no existing debt or your debt-to-income ratio is very low, you’ll likely get a tick in this box.
There are steps you can take to lower your debt-to-income ratio before going in for a mortgage. You could pay off some of the loans that are stretching your paycheck thin or try to increase your income. You could find a higher paying job or supplement your current income with a side job.
Credit Score and History
Credit score requirements vary from lender to lender and depending on whether the loan is conventional or government-backed.
On average, though, you need a credit score of at least 620 (good credit).
That said, a lender might want to delve deeper into your credit. For instance, they might want to establish whether you’ve had a bankruptcy or a foreclosure before making a lending decision.
If you’ve undergone any of these two events in the last 7 years, the information will be on your report. A lender might decide not to approve your loan, even if your credit score meets the minimum requirements.
Does this mean you can’t get a standard mortgage with bad credit?
Well, to be honest, this is hard, but not impossible. Having bad credit doesn’t necessarily mean you can’t be able to service a mortgage. There are lots of people pulling in six figures but still have bad credit, mostly because they’re yet to shake off past financial mistakes.
Here, you’ll need to get professional help from a mortgage broker who specializes in bad credit mortgages.
In most transactions, a mortgage borrower will pay 20 percent of the house’s sales price as a deposit.
As such, if you’re looking to buy a home worth $500,000, you should be able to pay a deposit of about $100,000 in cash. If you don’t have this kind of money, your option is to buy a cheaper house.
When you make a down payment, you also avoid private mortgage insurance, which would otherwise be added to your monthly repayments.
The Case of Home Equity Loans and Equity Release Mortgages
Mortgages aren’t just for people who are looking to buy a house. They can also be current homeowners.
If you own some equity in your home in the U.S., you can qualify for a home equity loan or line of credit. If you’re in the U.K., you can get an equity release mortgage. Read up more on a 1st UK equity release to gain deeper insight on qualification requirements.
You Can Get a Standard Mortgage
A conventional or standard mortgage is the most popular type of home loan. If you were wondering whether you can qualify for one, you now have the information you need to reach a sound conclusion. Plus, you can always seek the services of a mortgage broker or consultant.
Good luck and keep reading our blog for more consumer tips and insights.