You know how important your FICO credit score is to mortgage lenders. They rely on this number to gauge how well you’ve handled credit and paid your bills in the past. A high credit score means that you’ll qualify for a low mortgage interest rate. A low score? You might not qualify for a loan at all.
But mortgage lenders don’t look only at your credit score when you apply for a home loan. They also consider several other key factors — everything from your job history to the size of your down payment.
Here is a look at four noncredit factors that lenders will be studying when you apply for a mortgage loan.
Outside of your credit score, your debt-to-income ratio is the most important number for mortgage lenders. This ratio measures the relationship between your monthly debt obligations and your gross monthly income.
As a general rule, lenders strongly prefer your total monthly debts — including your estimated new mortgage payment — equal no more than 43% of your gross monthly income (your income before taxes).
If your debt-to-income rises past this level, lenders won’t be as willing to lend you mortgage money. They’ll worry that you’re already overburdened with debt, and the addition of a monthly mortgage payment will only make your financial situation worse.
Lenders prefer borrowers who have worked for the same employer, in the same position, for at least two years. Lenders believe that such workers are less likely to lose their jobs and, therefore, less likely to lose the income stream they need to pay their mortgage loan on time each month.
But there’s a lot of flexibility with this rule. For instance, if you took on a new job with your same employer in the last two years, this probably won’t hurt you. Even if you moved onto a new job with a different employer in your same industry, lenders probably won’t worry.
But what if you’ve taken a new job in a new industry in the last two years? That might cause some concern. Lenders might worry that you’ll be more likely to lose that new position. However, you can usually still qualify for a loan.
If you’ve been unemployed for a significant amount of time in the last two years, that can cause more problems. Be prepared to explain to lenders why you have a gap in your work history. As long as you have a solid income now, the odds are still good that you’ll be able to qualify for a home loan.
To qualify for the lowest interest rates, make sure you have enough money in savings. You’ll need money to pay for your down payment, closing costs, and a certain number of months’ worth of property taxes, of course.
But lenders often require that you also have enough in savings to pay at least two months of your new mortgage payment, including whatever you’re paying each month for property taxes and insurance. If your total monthly mortgage payment will be $2,000, you’ll need at least $4,000 in savings in addition to whatever you’ll be paying for closing costs and down payment.
Lenders want to see that you have savings in case you suffer a temporary reduction in your monthly income. This way, you’ll be able to use your savings to pay for at least a couple months of mortgage payments.
The size of your down payment plays a big role in the size of your mortgage interest rate. In general, the bigger your down payment, the smaller your interest rate.
That’s because lenders consider you less of a risk to default on your loan if you come up with a larger down payment. You’ve already invested more in your home, the theory goes, so you’ll be less likely to walk away from it.
You can qualify for mortgage loans today with a down payment of as little as 3% of your home’s final purchase price, in many cases. But if you want to qualify for the lowest interest rates? Putting down 20% of your home’s final purchase price — admittedly not an easy task — will increase your chances of nabbing that ultralow rate.