With all the news surrounding interest rates climbing and dropping, it’s easy to get caught up in the whirlwind of banks, loans and pre-qualification offers. But it’s not as cut and dry as simply locking in the lowest possible rate—more goes in to the numbers than that.Mortgage lenders look at a host of qualification points, including risk factors, income and income sources and available cash reserves:
Ratio of income to debtis one of the main factors banks use to determine how much financing you’ll qualify for. Typically lenders like to see a monthly payment at or less than 28% of your income—or for a ratio of monthly payments plus non-housing debt not to exceed 36%
·Credit historyincluding bankruptcies and mortgage defaults, which weigh particularly heavily on a prospective buyer’s ability to secure a loan
·Income sourcesas well as the reliability of your income. Freelancers, self-employed workers and buyers paid on commission will likely be subject to a more conservative estimate with regards to payback ability.
·Cash reserveswill also be reviewed and, in general, banks like to see a minimum reserve equivalent to three monthly mortgage payments. Should you experience a temporary hardship or brief period of unemployment, this will assure lenders the mortgage payment will be covered
·Down payment available, like cash reserves, is a major factor in determining if you qualify. The ability to put 20%—or even more—down can help smooth over other bumps in the application process, should they exist.
It’s valuable to do the math on your own income-to-debt ratio prior to applying for a mortgage so there are no surprises—and, likewise, it’s good to check your credit score for 6-12 months prior to when you plan on applying. If there are errors, inconsistencies or if you’re in the process of paying down debts, it can take up to six months for those changes to be reflected on your score—so it makes sense to plan
ahead.