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Qualifying for a mortgage involves meeting specific criteria that lenders use to assess your ability to repay the loan. At First National Bank of Oklahoma, we consider a variety of factors to make informed lending decisions. Here’s a detailed look at what impacts your mortgage application and what you can do to prepare.
Credit Score and Credit History
Your credit score is a major factor that lenders evaluate. It gives us insight into your current debt, payment history, and overall ability to manage credit. Ideally, a score of 640 or higher is recommended, though many loan programs require a minimum of 620. The higher your credit score, the better the chances of qualifying for a mortgage with favorable interest rates.
Key Factors Influencing Your Credit Score:
- Late Payments: Avoid late payments on loans and credit cards, especially on department store charge cards, which are common offenders.
- Credit Utilization: Keeping your credit card balances low relative to your credit limits improves your score.
- Derogatory Marks: Bankruptcies, collections, and repossessions can severely impact your ability to qualify.
Tip: You don’t need to carry a credit card balance to improve your score. Focus on consistent, on-time payments.
Debt-to-Income (DTI) Ratio
Your DTI ratio measures your monthly debt payments compared to your gross income. Lenders prefer a DTI ratio of 43% or lower, although some loans may allow up to 45%. A high DTI suggests you are over-leveraged, which may reduce your ability to handle additional debt.
Debt to Income Ratio Calculator: https://www.bankrate.com/mortgages/ratio-debt-calculator/
Examples of Monthly Debt: Auto loans, student loans, credit card payments, and the anticipated mortgage payment.
Tip: Pay off small debts to reduce your DTI ratio and increase your borrowing capacity.
Down Payment Amount
The size of your down payment affects both your eligibility and the type of mortgage you qualify for. Conventional loans typically require 20% down, though secondary market loans, such as FHA loans, can offer down payments as low as 3.5%.
Down Payment Tiers:
- 20% or More: May allow you to avoid private mortgage insurance (PMI), which can reduce your monthly payments.
- Less than 20%: PMI will likely be required until you reduce your loan-to-value (LTV) ratio to 80%.
Tip: Consider your budget carefully. A higher down payment reduces monthly payments and long-term interest costs but may deplete your savings.
Private Mortgage Insurance (PMI)
PMI protects lenders in case of default and is generally required for loans with less than 20% down. The type of loan affects how long PMI is required:
- Conventional Loans: PMI can be removed once you pay the loan down to 80% of the home’s value.
- FHA Loans: PMI typically lasts for the life of the loan.
- VA Loans: These loans do not require PMI and may allow 0% down.
Tip: Understand how PMI will impact your monthly payment when deciding how much to put down.
Employment History and Income Stability
Lenders want to see a stable work history, typically at least two years of consistent employment. Your income verification helps confirm that you can make regular payments over the life of the loan.
Documents typically requested include:
- Pay stubs or income statements
- Tax returns (usually for the past two years)
- Bank statements to verify down payment funds
Loan Checklist and Pre-Approval
Providing accurate and complete information during your application helps streamline the process and increases your chances of approval. Getting pre-approved offers several advantages:
- You’ll know how much you qualifying for a mortgage, allowing you to shop within your price range.
- Pre-approval strengthens your offer on a home by showing sellers you’re a serious buyer.
We encourage you to review our Plan Ahead Checklist below, which outlines the financial documentation you’ll need.
Other Factors: Closing Costs and Home Value
In addition to your down payment, be prepared for closing costs. These typically range between 2-5% of the home’s purchase price and include fees such as appraisals, title insurance, and lender fees.
An appraisal is crucial to ensure that the home’s value matches the purchase price. If the appraisal comes in lower than expected, you may need to make up the difference to avoid negative equity.
What Can You Afford?
While you may qualify for a higher loan amount, it’s important to understand your budget and determine a comfortable monthly payment. This includes factoring in additional expenses such as PMI, taxes, insurance, and maintenance.
Tip: Work backward from your ideal monthly payment to find a realistic loan amount.
PLAN AHEAD CHECKLIST
(NOT REQUIRED AT APPLICATION)
- Copy of driver license(s) and SS Card(s)
- 2 years W2’s
- 2 years tax returns (all schedules and pages)
- 4 paystubs (most current)
- 3 months bank statements (all pages) – of all accounts being used for closing funds
- Most recent stock/retirement account statement(s) – if using funds to close
- Copy of contract (when signed)
- Letter of explanation for any known credit blemishes- (if on the credit report)
- Insurance quote with name of Insurance Agent and phone numbers (homeowner’s insurance)
And if Applicable:
- Copy of divorce decree
- Copy bankruptcy papers and bankruptcy discharge
- Copy of sales contract
- VA Certificate of Eligibility and DD214
- Rent Schedules and REO list (include leases)
- Self Employed or Ownership 25% or more (if using income)
- Last 2 years corporate or partnership returns
Learn More about our Lending Solutions.