When it comes to taking out a mortgage, many borrowers are looking at how to begin, including who qualifies them for a loan and how they can qualify. There are several different ways to go about obtaining a mortgage loan, depending on an individual's personal circumstances.
For example, some first-time homebuyers may have more options available to them. Or those who can afford a higher monthly payment may be able to look into mortgage loans that require a lower down payment or lower credit score but add mortgage insurance.
Who qualifies you for a mortgage loan?
The type of mortgage loan a borrower is looking for determines how they need to get qualified for a loan. For borrowers who are looking at a non-conventional loan (or government-backed loan), they will have to qualify using standards set by government agencies such as the Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA).
Borrowers who get a conventional loan will qualify for a loan based on standards set by Fannie Mae and Freddie Mac, or by individual lenders.
To obtain a mortgage loan, borrowers can go to a bank, or a non-bank lender. Both use the same basic set of universally-accepted standards when approving borrowers for a loan. However, while this is a general business practice, the traditional approval process won’t work for everyone, especially those with alternative assets.
But some borrowers find more success in searching for smaller lenders that are more specific to their situation. Defy Mortgage redefines a more secure and efficient loan process, you can find out what that means for you. Email us at [email protected]
How to qualify for a conventional mortgage versus an alternative mortgage. Which is better?
Regardless of the type of loan borrowers are looking at, the mortgage lender will likely consider the same types of factors when determining if they qualify. As with any complex financial service, there are key differences, especially with conventional mortgages versus alternative mortgages, aka non-Qualified Mortgages. Here are a few examples:
How to qualify for a conventional mortgage
Regardless of the type of loan borrowers are looking at, the mortgage lender will likely consider the same types of factors when determining if they qualify. Here are a few:
Mortgage lenders will pull a borrower’s credit profile to determine if they can qualify for a mortgage. Lenders are looking to see low credit usage (about 30% or less of credit limits being used), good payment history, not many recent inquiries for credit and a variety of credit types.
Borrowers can improve their credit score by actions such as paying down debt, paying more than the minimum due on credit cards and making payments on time.
Borrowers must have enough income for the home they are looking to buy - they must show documented proof of income such as several weeks of paystubs. Self-employed borrowers can turn over documentation from their filed tax returns.
Borrowers must keep their total debt, including the new debt for the home they are purchasing below a max of 43% of their total income. Lenders look at monthly income versus monthly debt payments. If you are looking to take out a mortgage, paying down your current debt can help you increase the loan amount you can qualify for.
Mortgage lenders look at the total savings of consumers to determine how much risk there is in the loan. If borrowers have access to cash, or easy access to assets that can be converted to cash such as a 401k or other savings types, this creates less risk for the lender. It could reduce the consumer’s interest rate or qualify them for a higher loan amount.
How to qualify for a non-QM mortgage
Potential homebuyers who do not want to go down the route of the conventional mortgages process described above should consider a non-Qualified Mortgage. These mortgages are for private investments as opposed to being linked to the government entities above, and the market for non-QMs is growing!
Non-QM loans allow alternative assets — say a crypto-heavy investment portfolio – to qualify for the loan. So instead of traditional income verification methods, like pulling tax records, bank statements and/or investment assets, can be used to verify the borrower’s ability to repay the mortgage.
Is a non-QM a riskier loan? No. No, it’s not. Don’t let the name fool you, these loans still meet and exceed qualifications. In fact, lenders employ a higher set of standards when utilizing non-QM lending, according to Business Insider. However, this means lenders will charge more for the extra work that goes into a non-QM loan. This could take the form of a higher fee or slightly higher interest rate to offset the additional cost of originating a non-QM.
Looking for a secure and simple home loan process, but not sure which loan to try for? We can help! Send us a message at [email protected]. We can help with that.