– One of my clients once told
me that getting a home loan is about the financial equivalent of pulling your pants down in public. The lender always seems to want to get up in your business, right? But it's for good reason. See, they're lending generally hundreds of thousands of dollars to
help you in buying a home, and they just want to make sure that they mitigate their
risk as much as possible to ensure that they get paid back the loan that they're giving to you. So how do they do that? Well, that's exactly the
topic of today's video, how to qualify for a mortgage and the five home loan
requirements that lenders look for. You want to buy your first home, but maybe you don't have 20%
to put down, or perfect credit. That's okay, if you're
committed to a home purchase, then I'm here to help you do just that, maybe even sooner than
you thought possible. My name is Scott Wynn and I am a licensed mortgage advisor with the Wynn and Eagan
Team at Citywide Home Loans. If you want to buy a home
in the next 12 months, then click that subscribe button and together we'll make it happen.
(bell rings) When you go to get a preapproval, it seems like lenders want to see everything about you, doesn't it? But what exactly are they looking for? And how do you put yourself
in the best possible position to get a preapproval and the best possible loan terms you can? Well, it comes down to five things. The first thing is credit,
as you probably expected.
And of course the first
thing that the lender is gonna need to do is
pull your credit report. But won't that hurt your credit
because of a credit inquiry? Ugh, inquiries, I can not
tell you how many times I have heard that people
don't want their credit run because of a hit it might
take on their credit, but it's the only way for a
lender to get you qualified. It's not as big of a deal
as you think it might be. Generally, your score will drop somewhere between two and 10 points
with a credit inquiry.
The only way that a credit inquiry really will have a major
impact on your credit is if you're out looking to buy a car, to go out and get insurance, to buy furniture, and applying for credit
cards all at the same time. And if that's you, you're probably not the type of person that's concerned about
having your credit run. And you might be thinking, well, I have access to my credit score through credit monitoring, or maybe a service like Credit Karma. Can't I just tell you
what my credit score is? Well, that's another
problem in and of itself. There are actually multiple
credit scoring models out there, not just one. So you don't just have one credit score. You have multiple credit scores, depending upon the reason why
your score is being pulled. So when you look at your score, that's what's called a consumer score, but when a mortgage lender looks at it, that's a mortgage score. In fact, there are scores for auto loans and student loans and credit cards, multiple different scoring models, depending upon the type of
credit you're looking to obtain.
So what do lenders look for
when it comes to credit? The higher your credit score,
the better, to a point. See, there's going to be a
point at which your credit score will no longer give you
any additional benefit in terms of the mortgage
product that you'll qualify for, better terms on mortgage insurance, or better terms on your interest rate. And generally the max where you're going to
receive the best benefit is gonna be somewhere between
a 720 and a 760 credit score. So basically, if you have a 760 or an 820, it really doesn't matter anywhere in between those two numbers.
But even with scores below
that mark, below 720, you can still certainly get
qualified for a mortgage. The minimum score that gets you into most loan programs these days is going to be right around 620. And depending upon the loan
program that you select, there may not be a big
difference in the loan terms that you receive between
a 760 credit score and a 620 credit score. And not only that, but
good mortgage advisors can give you some different tactics, and strategies, and guidance on how to quickly boost your score to better position yourself
for a mortgage loan that you're looking to qualify for.
Related to credit is debt, and that's our second item here. Debt is looked at as a ratio. So what mortgage lenders do is they calculate out your
minimum monthly payments on your debts. They add all of those up and they compare it to
your gross monthly income. And generally mortgage lenders like to see that somewhere between 45
and 55% on the high end, but it depends on your
loan program, down payment, credit score, and generally
your overall risk. Which brings me to the
third item, your income. Here's what might sound a little crazy, but you actually don't need a job in order to qualify for a mortgage.
What we care about is a reliable and consistent source of income. In fact, I've had customers
qualify for a mortgage using earnings from gambling. It comes down to history and future, with a little more
weight put on the future. When it comes to variable-type income, things like gambling earnings, but something more common like overtime or bonus, commission, or
self-employment-type income, generally, we need to show a history of about two years of receiving that so that we can average that income out in order to utilize it for the future.
Which brings me to the next point, which is we need to document that you have at least
an expected continuance over the next three years
to receive the income that you're receiving. A good example of this
is a source of income, like child support, where the child support will end at a particular point in time when the child reaches a particular age. Another example is retirement income. Let's say you are retired
drawing money from a 401k or an IRA at, let's say $50,000 each year. Well, if we cannot document that you have at least $150,000
in that retirement account, then we won't be able to use that income because we can't prove that
it will be able to continue for at least the next three years.
But that brings me to the
next item in our requirements to get a home loan, which is employment. Employment is going to
be similar to income, but slightly different. We still need to document
that three year continuance. Now, most employers will not guarantee that you will have a job
three years from now. And so what mortgage lenders
will do is basically assume that you'll be employed for
at least the next three years, unless there's something
specifically stated about the fact that you will not. A good example is
contract-type employment. And teachers are a good example of contract employment. Well, then it goes back to how
we did it related to income. We document a history
a couple of years back to prove that this is
standard for the industry and something where your
contract gets renewed regularly.
And as long as we can document that and the employer doesn't
tell us anything specific about the contracts not being renewed, then we can utilize that employment and that source of income
when qualifying you for a mortgage. But just because you're
employed somewhere, doesn't necessarily mean you're set to go. A good example is when
you have large job gaps, meaning you've had some time
away from being employed.
Let's say you decided to take a year off, for whatever reason. It really doesn't matter. Well, in that particular case, you can't necessarily go out, get a job, and then go and qualify
for a mortgage right away. Normally you have to
match the time out of work with the time back on the job. But most lenders will allow for six months as a maximum time period back on the job in order to qualify you. So in the example of one year out of work, once you've been back on the
job for about six months, generally, we can use that
income for qualifying.
But if let's say you just
took a month off of work, well then a month back on the job and you should be set to go. Last up in the five requirements to get a home loan is assets. Now there's two different
things that we look at when it comes to assets. The first one is the minimum down payment. Now each loan has different
down payment requirements. USDA is 0%, VA, 0%, FHA at 3.50% and conventional
somewhere between 3 and 5%, depending upon your circumstances. Now for down payment, we must document that the money came from your source of funds, meaning your checking
account, your savings account, your retirement account, or the sale of some asset that you had, such as a home or a car. But let's talk about that for a second. Well, in that situation, we
have to document a paper trail, a paper trail of ownership,
as well as receipt of funds. So let's say you're selling a car. Well, the first thing we must document is that you owned the car. The next thing we'll need to document is that you sold the car with a bill of sale or
something like that.
And then we'll have to
document that those funds that match the bill of sale got
deposited into your account. But a paper trail is gonna be important, whether you're selling something or not, meaning if there's any random deposits that show up in any of your accounts, we have to document where
that money came from. There is one exception to the rule that the money must be yours, and that is in the situation of a gift. Now, almost all loan programs
these days allow for gifts. However, they're generally
going to be limited to gifts from family members.
Of course, there are some
exceptions, but they're very rare. So if you have a situation where you're gonna be getting gift money from somebody that's not a family member, I would encourage you to speak directly with the mortgage advisor to see if it will be an
allowable source of funds. The second area of assets is reserves. Not only will you have down payment, but you'll also have closing
costs to pay for at closing. Quick side note here, one thing that is allowed
to be paid by somebody else, and doesn't have to come
in the form of a gift is closing costs. See, closing costs are allowed
to be paid for by the seller. Now each loan program
has a different maximum that is allowed to be
paid for by the seller. But generally that amount
is about three to 6% of the purchase price. So whatever amount of
money you have left over after closing, after paying
for both down payment and closing costs, is
referred to as reserves. Now, reserves are generally represented as a month period of time, meaning how many months
of reserves do you have in order to make your mortgage payments after closing with the money left over? So let's just say that
your mortgage payment is $2,000 a month, and you have $20,000 of money
left over after closing.
That would mean that you would
have 10 months of reserves. The more reserves you
have, the lower the risk and better qualified you are
from the mortgage perspective. So there you have it, The five requirements to getting
approved for a home loan, credit, debt, income,
employment, and assets. Did I answer the question
you came looking for? If not, leave your question
in the comments below and I'll be sure to reply. And if you found the info helpful, I'd love a click on that like button. If you're serious about making
your first home purchase, check out these other videos as you work towards buying a home, or you can call or text me
and I can help you directly..