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How to Become Eligible for a Home Loan

by Shala Munroe

Mortgage lenders have strict requirements for the people they provide home loans to. With a decent credit score, steady employment history, low debt and a substantial down payment, you shouldn't have a problem getting a mortgage. However, if you're struggling with any of the mortgage requirements, fix the issues before applying for a home loan. This takes time, sometimes a year or longer, but you must have all the puzzle pieces in place to become eligible for a home loan.

Call a few lenders to ask their mortgage qualification requirements. Each lender has different credit score and down payment requirements and other factors for you to be eligible. Ask about different loan programs, such as conventional and Federal Housing Administration (FHA), to find the loan and qualifications that are the best fit for you. Getting the information doesn't obligate you to work with a particular lender, but it gives you the qualifications you need to apply for a mortgage.

Check your credit score by visiting the Annual Credit Report website. This pulls your reports from all three major credit bureaus with the option to view your credit score for a fee. All lenders have credit score requirements. For a conventional loan, you typically need a score of at least 720 to 730 for the best rate. For an FHA or government-insured loan, a score of 620 might suffice. The higher your credit score, the lower your interest rate is likely to be.

Rebuild your credit if you're not satisfied your current score allows you the best possible interest rate with your lender. Pay your bills on time, and catch up on any late payments on items such as credit cards. Pay off credit cards if possible. Dispute incorrect negative marks on your credit report; each credit bureau has an online dispute resolution process. Building a better credit score takes months in a best-case scenario, but it gets you closer to the mortgage loan you want.

Calculate your debt-to-income ratio. This is a key number mortgage lenders use to ensure you're eligible for a home loan. To calculate this ratio, determine your monthly gross income. Then, add all your debt payments, such as car loans, credit cards, student loans and the monthly payment amount of the potential mortgage you want to apply for. Divide your total monthly debt payments by your gross income to determine the ratio. For example, if your debt plus the proposed monthly mortgage payment is $1,500 and you make a household income of $6,000 per month, your debt-to-income ratio is 25 percent.

Lower your debt-to-income ratio, if necessary, to qualify for a mortgage. Lenders have different requirements, but most have an upper limit of no more than 43 to 44 percent. To lower the ratio, select a house with a lower sales price; this typically translates into a lower proposed mortgage payment, which affects the debt-to-income calculation. Paying off existing debt, such as credit cards or car loans, also lowers the ratio.

Save for a down payment. Lenders prefer a down payment of at least 20 percent, but some allow a lower down payment, such as 10 or 15 percent. Government programs, such as FHA loans, might consider an even lower down payment. However, even a 5 percent down payment is a significant amount of money. When purchasing a $200,000 house, for example, 5 percent is $10,000.

Review your employment history. Most lenders need at least two years of steady employment to qualify you for a mortgage. You don't necessarily need to work at the same company for two years with every lender, but you should stay in the same field and make about the same amount of money for that period. Lenders often require W-2s, pay stubs and tax returns as proof of employment history. If you've jumped jobs often but think you can stay in your current job for a while, building a steady employment history before you apply for a mortgage helps your chances of success.

About the Author

Based outside Atlanta, Ga., Shala Munroe has been writing and copy editing since 1995. Beginning her career at newspapers such as the "Marietta Daily Journal" and the "Atlanta Business Chronicle," she most recently worked in communications and management for several nonprofit organizations before purchasing a flower shop in 2006. She earned a BA in communications from Jacksonville State University.

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