Minimum Loan Qualifications

I'm thinking about buying my first house. Where do I start?

Before entertaining a purchase decision, you should survey these items: income, employment stability, credit, assets and the price/value of the house you want to purchase.

First and foremost, you need to demonstrate good credit to convince your mortgage lender that you will make the mortgage payments on time. After all, the lender is expected to give you, a perfect stranger, a hundred thousand or more dollars on not much more than a signature and a handshake! If you have any doubt about your credit files, we strongly suggest that you order copies of your credit reports (3 bureaus) before taking further action.

Next, you'll need to show enough income to comfortably make the payments on the house you want to finance. You need to show job stability, so the lender can expect your income to continue. You also need to demonstrate at least enough assets to pay for the various closing costs, fees and deposits required on a home contract (i.e., a mortgage payment in reserve and a couple months' taxes and hazard insurance). Depending on the size of your down payment, other deposits may be required.

What if my credit report isn't all that perfect?

The bank wants to give you a mortgage. Nobody wins unless you do. Your job is to show them you are worthy of the credit they want to extend.

A good approach is to order copies of your credit reports from the three bureaus that monitor your credit. This way, you can review what the lender will see and plan accordingly. UpMyScore is an excellent resource and has helped thousands of consumers massage their credit into shape.

Or, worst case scenario, you can elect to abandon the project, before you've lost valuable time and money...

Mortgage lenders order credit reports from all three credit bureaus, Trans Union, Experian, and Equifax so that they have all the information available on a loan candidate.

Sometimes one bureau will have information the others have not picked up.

What does a lender look for with employment?

Stability and employer satisfaction. If you work for yourself, you'll need to demonstrate business viability and enough income to carry the new loan and other current debts comfortably.

Verifying Employment:

Employer verifications are sent out on the loan applicant. The lender is looking for employer satisfaction, verification of claimed income and time on the job. You need to be able to show a reasonable length of time in the same job, or at least the same profession.

A word for the self-employed:

Those who are self-employed will need to show that the business is viable. This varies from lender to lender, but the standard requirement is usually two years. Also, business tax records need to show a profit from the business, not a loss. One pitfall is that tax records show a business with little or no clear income. This may be fine for the business operator, but it presents no viable income for a mortgage application.

Note: If your tax records don't show enough income, but you have good credit, you can probably get a slightly more expensive "No Income Verification" mortgage with a good-sized down payment.

What should my income level be?

You'll need to show enough income to comfortably make the payments on the house you want to finance.

What does a lender expect to see when it comes to assets?

A pattern of saving looks very good to the lender. The lender will also want to see enough money left over, after the down payment, to pay certain reserves into escrow.

Cash Reserves:

In a purchase contract, where possible, there should be savings held in reserve. It differs from case to case, but some lenders like to see two months of mortgage payments (PITI) held in reserve, plus three to six months' worth of fire insurance and three months' worth of taxes—depending on the policies of the lender. Finally, there should be enough to cover the various closing costs of the transaction.

Early in the mortgage process, you will be given a Good Faith Estimate (GFE) by the lender, which will detail all the expenses of the purchase process. If your down payment was less than 20% of the value of the house, you can also expect to pay private mortgage insurance (PMI). How much will vary from lender to lender. (More about PMI in the next section.)

When you get the GFE, review it carefully. While the GFE is just an estimate and will constantly be revised, it remains an excellent planning tool. Now is the time to get everything on the GFE fully explained and adjusted, if necessary. If your reserves are limited declare this to the lender up front.

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