Home buyers often can’t figure out how much they can afford to spend on a home until they have talked with a mortgage company. A mortgage company can pre-qualify a home buyer for a certain home loan amount, and then they can shop for homes in that price range. Home sellers are also more apt to deal with buyers that have already been pre-qualified for a home loan. This means filling out a home loan application and having all the required documents ready. 

Before attempting to pre-qualify for the lowest home mortgage rates possible, it is important for home buyers to have an understanding of their credit report. Mortgage lenders talk to various credit bureaus to look at the credit reports for potential borrowers, and consumers can request free copies of their own credit reports from these bureaus. This way they can check if any inaccurate information is listed, and contact the creditors to have it fixed. Small debts can also be taken care of before applying for a home loan. Home buyers should also be able to explain any large debts that they have to their potential mortgage lenders. 

Mortgage lenders look at the debt-to-income ratio of borrowers to qualify them for low mortgage rates. There are two income-to-debt ratios established by the Federal National Mortgage Association, which is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. This organization is also known as Fannie Mae. They require that mortgage payments and all the fees included do not exceed 28 percent of the income. The total debts that a mortgage borrower carries, including the mortgage itself, cannot exceed 36 percent of their income. Mortgage lenders also usually require a 20 percent down payment to qualify for a low mortgage rate on a traditional home loan. 

The income needed to qualify for a home loan will depend on the mortgage interest rate and the monthly mortgage payment amount. A 30-year home loan with a 4 percent interest rate and monthly payments of $454 on a $95,000 home loan will require a yearly income of at least $21,770. Most borrowers cannot get approved for these low mortgage interest rates, though. A home loan with an 8 percent interest rate and monthly payments of $697 on the same loan is more likely, which will require a yearly income of $33,460. Most people in high-priced real estate markets like California and New York need mortgage loans in the hundreds of thousands, so this is a low estimate. 

A mortgage company will use these kinds of debt-to-income ratios to analyze a borrower’s mortgage payment. The above example also assumed a ratio of 25 percent. In order to qualify for the best mortgage rate, home loan borrowers should get rid of as much debt as possible. This should ensure pre-qualification for low mortgage interest rates, which in turn grants access to the best homes.