How to Qualify for a Mortgage Loan: A Borrower's Guide

In this article, we will talk about what it takes to qualify for a mortgage loan. If you are reading this article right now, you are probably well aware of the changes in the mortgage industry over the last few years. The housing market crisis of 2008 to 2009 has affected every aspect of the home buying process. And that includes the mortgage qualification process.

We will talk about how to qualify for a mortgage loan in just a moment. But first, I want to go over some basic terminology. It's important to understand what these terms mean, because they represent key steps in the mortgage qualification process.

1. Mortgage pre-qualification -- This is when a mortgage lender does a quick review of your financial situation, to determine how much they might be willing to lend you.

2. Mortgage pre-approval -- This is a more in-depth review process. During a pre-approval, the lender will request a variety of financial documents from you. They will also review your credit score and other factors relating to your financial history. Based on this review process, the lender will tell you how much they are willing to lend you. It's not a commitment by the lender, but it does give you a good idea where you stand.

3. Final approval -- After you make an offer to buy a house, you will go back to your lender for the final approval. They will review the purchase agreement and then send a professional appraiser to determine the value of the house. If everything checks out, you will be approved for the loan.

When people talk about getting qualified for a mortgage loan, they may be referring to any of the three steps listed above. In this article, when I talk about qualifying for a mortgage loan, I'm talking about the final approval. After all, this is the most important step. This is when you actually received financing from the lender. It's when the "deal goes through." So let's talk about how to qualify for a mortgage loan in the current economy.

What You'll Need to Qualify for a Mortgage

When you apply for a mortgage loan, the lender is going to review every aspect of your financial situation. But there are several factors that matter more than others, when it comes to qualifying for the loan. These factors include the following:

  • Credit Score -- Do you know what your credit score is right now? If not, you might want to check your score today. It will prevent any unpleasant surprises down the road, when you're ready to apply for a mortgage. These days, you'll probably need a credit score of 600 or higher to qualify for a mortgage loan. As with everything else, this number is not set in stone. If you're strong in all of the other categories below, you might qualify for a loan with a score in the low-600 range. It just depends.
  • Income -- Your income must be able to support your monthly payments. You'll have to document your income in some way. Ideally, you've been steadily employed for at least two years. The lender will use a certain "debt ratio" to make sure you make enough money to cover your various debts (including the mortgage payment). See the next item to learn how your income and debt go hand-in-hand.
  • Debt -- When it comes to mortgage qualification, your debts can only "consume" a certain amount of your gross monthly income. You actually have two of these debt-to-income ratios. For example, a lender might allow debt ratios of "28/36." The front ratio is 28, which means that your monthly mortgage payment cannot account for more than 28 percent of your gross monthly income. The back ratio is 36, which means that your combined debts (mortgage, credit cards, car loan, etc.) cannot exceed 36 percent of your monthly income. These numbers are just an example. They are not written in stone. FHA debt ratios are a bit more lax.
  • Down Payment -- The days of "no-money-down mortgage loans" are behind us. You'll have to make a down payment of some kind to qualify for a mortgage. The only exceptions to this rule are VA or USDA home loans. The down-payment requirement will depend on the type of loan you're using, among other factors. With an FHA loan, you could put as little as 3.5 percent down. With a conventional mortgage, you'll have to put at least 5 percent down.
  • Cash Reserves -- This is extra money in the bank, aside from what is needed to cover your down payment and closing costs. Most lenders will require you to have cash reserves of some kind, typically enough to cover the first one or two mortgage payments.

In order to qualify for a mortgage, you'll have to "measure up" in each of the categories listed above. Different lenders have different qualification requirements. So I can't say where you need to be across the board, for each of the items listed above. It just depends. With that being said, there is also a lot of standardization in the mortgage industry. So if you qualify with one lender, you'll probably qualify with most others as well.

Here's an example of a well-qualified borrower, by current standards:

  • Borrower has sufficient income for the size of loan desired. Total debts do not exceed 36 percent of gross monthly income. Borrower can document his income.
  • Borrower doesn't have too much debt (car loans, credit cards, etc.), relative to income.
  • Borrower has a good credit score. The middle FICO score is higher than 640.
  • Borrower has at least 5 percent for a down payment, or 3.5 percent for an FHA loan. A down payment of 10 percent is even better.
  • Borrower has enough money in the bank (i.e., cash reserves) for the first two mortgage payments. This is above and beyond the money needed for down payment and closing costs.

This person would probably be able to qualify for a home loan. Again, none of this is written in stone. If you are strong in four out of the five categories, a lender might let you slide a little in the fifth category. For example, if you have excellent credit and a large down payment, you might "squeak by" with a debt-to-income ratio outside of the desired range. You could still qualify for the mortgage loan, based on your other strengths.

Ready to Apply for a Loan?

If you feel that you're a qualified borrower based on everything we've discussed in this article, there is no reason you shouldn't apply for a mortgage loan. After all, that's the only way to find out where you stand. You have nothing to lose except (in some cases) an application fee. Can you qualify for a mortgage? Find out today.

Click here to start the pre-approval process

This article answers the question: How do I qualify for a home loan these days? If you would like to learn more about this topic, you can use the search box at the top of this page. There are literally thousands of mortgage-related articles and news stories on this website. So you're bound to find what you need.