Financial Considerations Before Applying for a Mortgage

Financial Considerations Before Applying for a Mortgage

A home is one of the biggest purchases you’ll ever make. Securing a home without financing would make homeownership impossible for many buyers, but mortgages offer an alternative. A mortgage is a loan that a financial institution, like a credit union, provides so you can purchase a home and pay it off over time.

When you take out a mortgage, your new property serves as collateral. Besides paying back the principal balance of the mortgage, you’ll also pay interest on the principal balance, property taxes, and mortgage insurance if it’s required by your lender.

Before you apply for a mortgage, it’s important to familiarize yourself with the homebuying process. You’ll want to understand how mortgages work, and it helps to learn about the following.

To qualify for a mortgage, you must meet several requirements. Here are six of the financial prerequisites for getting a mortgage.

1. A Reliable Source of Income

Potential mortgage lenders will want proof of your income, as well as the income of anyone else whose name will be on your mortgage, such as a spouse. They’ll ask for documentation to verify your income amount, such as tax returns and/or pay statements. In addition to the amount of your income, they’ll look for consistency over time. If they notice drops in income, they may ask for justification or documentation proving that the decrease was only temporary.

Having a sufficient, consistent salary or other means of income shows you have the monthly funds to make your mortgage payments.

2. A Debt-to-Income Ratio Within the Guidelines

Your debt-to-income ratio reflects the percentage of your monthly income that goes toward paying down debt. This number is another reason that having a reliable source of income is so important.

If you have a high debt-to-income ratio, you may be at an increased risk of making late payments, partial payments, or failing to make payments altogether. A low debt-to-income ratio signals that you’re less likely to struggle with your mortgage payments.

To calculate your debt-to-income ratio, divide the sum of your monthly debt payments by your monthly income.

3. An Established Credit History

A strong credit history can potentially increase your chances of qualifying for a mortgage under favorable terms. Some lenders practice risk-based lending, which means that your interest rate decreases the higher your credit score is. However, even lenders that don’t practice this have credit standards borrowers must meet in order to be approved for a loan.

Your credit history reflects the debt you’ve worked to pay down and how you manage revolving debt, like credit cards. Making payments on loans for a car, college, and other expenses will create a record of your ability to pay back your debts and help increase your score. When you have a higher credit score, you’ll have a better chance of approval for a mortgage.

4. Required Documentation

Before a lender approves your mortgage application, they’ll expect to see several documents that confirm your identity and provide proof that you’ll be able to make your payments in full and on time. The list of required documentation for most lenders is below.

  • Photo identification
  • Your credit report
  • Your tax returns
  • Proof of income, including pay stubs and W-2s
  • Bank statements and proof of assets
  • Letters confirming funds you’re putting toward the home’s purchase from loved ones are gifts, not loans
  • Proof of renting history, including checks your landlord cashed

5. Funds for a Down Payment

Your down payment is one of the first investments you’ll make in your home. The amount of money you can put down on your house affects the total amount you’ll need to borrow, your interest rate, and whether your lender requires you to pay private mortgage insurance (PMI). If you make a large down payment, you’ll need a smaller principal balance, and your lender might offer you a lower interest rate without PMI. The size of your required down payment may vary based on your lender.

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Buying a home is a big decision. Fortunately, we can help you form a plan that meets your unique needs, offering competitive rates and personalized service.

Learn more about our variety of mortgage loan products today.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.