How to qualify for a mortgage: First-time home buyer tips

February 15, 2023 - 5 min read

Do you qualify for a mortgage?

Buying a home can be intimidating, especially if you’re a first-time homebuyer asking yourself how to qualify for a mortgage. When qualifying for a home loan, a lender reviews your finances to see if you can comfortably afford a mortgage.

However, understanding how lenders determine eligibility can build confidence and help you navigate the home buying process.

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How do lenders determine if you qualify for a mortgage?

To determine if you qualify for a mortgage loan, a lender will verify your income, debts, and assets. They’ll review the following information:

  • Income tax returns from the previous two years
  • W-2s
  • Most recent paycheck stubs
  • Proof of other income
  • Credit report
  • Bank account and investment account statements

Qualifying for a mortgage requires a stable income source and enough cash in reserves for mortgage-related expenses like the down payment and closing costs.

While reviewing your assets, your lender looks at your monthly debt payments and payment history. Your debt-to-income (DTI) ratio impacts how much you can borrow, and your payment history indicates whether you’re likely to pay your mortgage on time.

How to get approved for a home loan

You must complete a mortgage application and submit supporting documentation to get approved for a home loan. The sooner you provide your lender with this information, the sooner they can approve your application.

Before applying, you can shop around and compare mortgage rates with different lenders — at least three. Oftentimes, you can apply for a home loan online and upload documents to a secured portal. From here, the lender determines your ability to repay a loan.

Certain factors can make it harder to get approved for a home loan. These include an unstable income, a low credit score, too much debt, and insufficient assets.

How can I increase my chances of getting a home loan?

Since obtaining a mortgage is one of the most significant financial decisions you could make, it’s crucial to put your mortgage application in the most favorable light possible. It will not only ensure a much smoother, stress-free experience but also help reduce the amount of interest charged on the loan.

To help you get into your dream home, we’ve put together a list of steps you could take to increase your chances of securing a home loan.

Improve your credit score

Although higher credit scores typically come with a more competitive interest rate, you don’t always need a high credit score to qualify for a mortgage. Typically, you’ll need a minimum score of 620 for a conventional loan, 500 to 580 for an FHA loan, and 640 for a USDA loan.

VA loans don’t have a minimum credit score requirement, although most lenders require a score of at least 620 for this program.

With that said, there are some actions you can take today to spruce up your credit profile and boost your chances of qualifying for the best mortgage rate.

Steps you can take to raise your score include:

  • Pay your bills on time. Payment history makes up 35% of your credit score
  • Pay down your balances to improve your debt-to-income ratio
  • Check your credit report and dispute errors
  • Avoid new debt
  • Get a secured credit card and establish a credit history
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How to qualify for a mortgage: Lower your debt-to-income ratio

Reducing your debt-to-income (DTI) ratio can increase purchasing power, and create more disposable cash for building a down payment fund.

This ratio measures how much of your gross monthly income you spend on monthly debt payments. Generally speaking, lenders require a DTI ratio (which includes your new mortgage payment) of no more than 36% for a conventional loan and 43% for an FHA loan.

Your lender might allow a higher ratio (up to 50%) if you have compensating factors like an excellent credit rating or a substantial cash reserve.

DTI ratio helps lenders assess your borrowing risk. To lower your ratio, pay off credit card balances and other loans. Likewise, you can lower your debt-to-income ratio by increasing your income.

Decide how much house you can afford

Only a lender can decide how much house you can afford. Even so, before meeting with a lender, you can use a mortgage calculator to “estimate” affordability.

To get started, enter your annual income, total monthly debt payments, the size of your down payment, and your credit score range. Based on this information, calculators estimate how much you’re able to borrow, and the projected monthly payment for this amount.

Save for a bigger down payment

You don’t need a 20% down payment to buy a home. Conventional loans only require a minimum 3% to 5% down. In addition, many government-backed loans allow low down payments.

FHA loans require a minimum 3.5% down, and USDA and VA loans don’t require down payments.

However, purchasing with less than 20% down often requires paying mortgage insurance. This protects your lender in the event of default. To avoid mortgage insurance, you can save a bigger down payment—reduce your monthly expenses and save the difference, get a part-time job or side hustle, sell personal belongings, or use gift funds from a relative.

Don’t change jobs

Many mortgage programs require at least two years of employment history, or 12 months if you’ve recently graduated college. So once you’ve started the mortgage application process, ideally, you shouldn’t change jobs.

Taking a new job opportunity doesn’t always negatively impact loan applications, but sometimes it does. This can happen if your new job pays less or if your pay structure changes (maybe you’re switching from a salary to commissions).

As a general rule of thumb, avoid employment changes until after closing. If you have to change jobs during the mortgage process, notify your lender as soon as possible.

Consider a co-borrower

If you’re having difficulty qualifying for a mortgage—perhaps due to a higher DTI ratio or a short employment history— using a co-borrower can help you get approved. This person must have good credit and agree to be responsible for the mortgage payment if you default.

Obtain a mortgage pre-approval

A mortgage pre-approval isn’t required before house hunting, but it’s highly recommended. This way, you know how much you can afford before submitting an offer. In addition, some sellers prioritize bids submitted by pre-approved borrowers.

Once you’re pre-approved, your lender issues a pre-approval letter that you can include with your home offer. Keep in mind, though, a pre-approval doesn’t guarantee closing—it’s a conditional approval. The loan must go through the underwriting process before it’s finalized.

Final approval is based on the home appraisal report, and barring any major changes to your credit and finances.

Next steps

Are you ready to get qualified for a mortgage loan? The next step is to check your credit report and make sure all information is accurate. Next, gather the necessary documents and complete a mortgage pre-approval. Once a lender reviews your information and issues a pre-approval letter, you can start the journey of looking for a house.

Time to make a move? Let us find the right mortgage for you

Valencia Higuera
Authored By: Valencia Higuera
The Mortgage Reports contributor
Valencia Higuera is a freelance writer from Chesapeake, Virginia. As a personal finance and health junkie, she enjoys all things related to budgeting, saving money, fitness, and healthy living.