Qualifying for a Mortgage Loan

Banks don't loan money to just anybody. They want to feel secure that you're able and responsible enough to pay them back. So you'll usually need these things in order for the bank to give you a loan:

  • Enough money for the Down Payment (3 to 20% of the purchase price)
  • Two years of steady employment (same job or field)
  • Good (not perfect) credit score (~660+, as of 6/09)
  • Monthly income that's 2 to 3 times higher than your expected monthly mortgage payment

If you don't have all four items above right now don't fret. You still have some options.

  • Meet with a lender anyway. Don't just assume you can't get a mortgage. It can't hurt to go talk to a bank and see whether they're willing to give you a loan. Even if they won't give you a loan they can probably help you by letting you know where the deficiencies are, so you can work towards qualifying in the future.  
  • Use a Mortgage Broker. A mortgage broker represents lots of different lenders so they can shop around to try to find one who will make you a loan. They charge a fee for this service but if you can't get a mortgage otherwise then it could be worth it.

  • Try to get the owner to finance all or part of the cost of the home. Getting an owner to finance a home is difficult, but if you have no other options then it's worth a try. You can increase your chances of success by offering a higher interest rate and/or asking the owner to finance only part of the cost of the home. See our page on owner financing.

  • Get a co-signor. See if a family member or very close friend with a higher income and better credit than yours will cosign a loan for you. That means that the loan will be yours and you'll be responsible for paying it, but if you don't, the cosignor will have to pay it. Obviously the cosignor will have to have a great deal of trust in you for this option to work.

  • Have a friend or family member buy the house, and rent-to-own it from them. Friends and family might be wary of co-signing a loan for you because their credit gets ruined if you don't make the house payments, and they have little recourse against you. A more attractive alternative is to have your friend or family member buy the house in their name, and then rent it to you with an option to buy.

    Here's how it works: You'll make the mortgage payments and pay for taxes, insurance, and maintenance, as your "rent". You can get the house in your name by either making all the payments after 30 years, or by buying the house for the amount of the remaining mortgage once your credit improves enough for you to get your own loan. If you fail to make your payments, you forfeit your right to buy the house, and your friend/family member can either pick up the payments or sell the house. Either way, they're not out because they already own the house. They don't have to foreclose if you don't pay, because the house was already in their name. For that reason this arrangement can be more attractive to them than the idea of their being a cosignor.

    In fact, if you don't have the money for a down payment, your friend/family member might loan you the money for the down payment as well -- usually for a slightly higher interest rate than the mortgage.

    A downside of having someone buy the house for you is that the interest rate will be about 1% higher because the house will be considered investment property for the buyer and not a residence, since they're not going to live in it. Still, if the only way you can get yourself into your own home is to pay a little more interest, it might be worth it.

    Note that rent-to-own real estate deals might not be legal in some states, so check with an attorney before signing the papers.

  • You no longer have the ability to get a no-doc or stated income loan.  In the past banks would often make loans without requiring you to prove your financial suitability, in exchange for your agreeing to pay a higher interest rate.  But those days are long gone.

  • Plan for the future. Even if you can't buy a home right this very minute if you make home-owning a serious goal then within two years you can probably overcome most or all of any obstacles above.
This particular page was inspired by and is dedicated to Corinne Carson.

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