You can’t get a mortgage until you can afford the home loan payment. But the amount of your paycheck isn’t the only thing banks consider. Underwriting also looks at the stability of your income.

 Not everyone applying for a mortgage is approved. And sadly, some people are rejected for home loans because they don’t fully understand a lender’s income requirements. You don’t need perfect circumstances to qualify for a mortgage loan. But you must prove that your income is stable and consistent.

1. No gaps in employment

 When applying for a home loan, the lender also looks at your employment history. The bank checks for any significant or recent gaps in employment. Of course, mortgage lenders realize that some situations are beyond your control. So if you have gaps in employment within the past two years, you might still qualify for a loan if you can provide a reasonable explanation.

 Maybe you were laid off, but found work within a couple of weeks or months in the same field. But if you’re just now returning to the workforce after a significant gap, or if you’re newly employed with a short work history, the lender might question the stability of your employment, which makes you a risky candidate for a home loan.

2. Avoid frequent job changes

Even if you don’t have gaps in employment, frequently switching employers every year or six months can make a lender nervous. Your income may be consistent, but lenders prefer applicants who’ve been with the same employer for at least 24 consecutive months, or who’ve at least worked in the same field for two years.

Fortunately, some lenders also take into consideration the reasons behind frequent job changes. For example, if job changes resulted in moving up in your career, your lender might overlook the switch.

3. When did you become self-employed?

Self-employed people can qualify for a mortgage loan, but this depends on several factors, such as when you became self-employed and your income according to tax returns.

 You will need to provide at least two years of tax returns before you can qualify for a home loan as a self-employed borrower. This is important, so keep good records. As a self-employed borrower, you don’t receive a paycheck stub or a W-2. Your tax return is the primary statement lenders use to verify your income.

 Be aware that business deductions or write-offs lower your net income, which can also reduce your qualifying amount when applying for a home loan. Therefore, if you’re planning to purchase a home, consider limiting your number of tax deductions for a couple of years to boost your net income. When a lender evaluates your tax returns, underwriting also checks to see if your income has increased or decreased over the past two years. Self-employed people typically experience fluctuating income from year to year. With that said, mortgage lenders use their average income over a two-year period for qualifying purposes.

Some homebuyers focus their energy on finding a house within a specific price range. But while getting a fair price for a property is important, it’s also advantageous to secure a low-rate, affordable mortgage loan.

Mortgage interest rates vary from lender to lender. This is why it’s crucial to shop around and compare home loans offered by different lenders. These lenders include big banks, community banks, credit unions and online lenders. After completing a pre-qualification form, these financial institutions can evaluate whether you’re eligible for a home loan, and provide a rough estimate of what you can expect to pay with regard to interest and fees.

Interest affects how much you pay on a monthly basis and over the life of the mortgage. Mortgage fees, or closing costs, include the lender’s loan origination fee, credit application fee, appraisal fee, attorney fees, etc.

Purchasing a home is a major investment, and sad to say, mortgage-related costs can drain your savings. Comparison shopping, on the other hand, can help you procure a low-rate mortgage, plus save on lender fees.

Every time you contact a lender to request a rate quote, the bank will pull your credit report. You might already be aware that too many inquiries can hurt your credit score. Typically, each inquiry reduces credit scores by a few points. The number of points lost per inquiry varies depending on the type of pull. What’s more, an inquiry can remain on your credit report for up to two years.

This knowledge stops some homebuyers from requesting multiple mortgage quotes. You shouldn’t let your fear of inquires prevent comparison shopping. If you never compare loan offers, there’s no guarantee that you’ll find the most favorable rate or the lowest fees.

The good news is that shopping for a mortgage doesn’t have to damage your credit score. But to avoid credit damage, you have to compare mortgages the correct way.

While checking your own credit doesn’t hurt your credit score, it’s a different story when a lender checks your credit. Each credit pull can lower your score by as little as two points, or as much as five points. So it’s important to only apply for credit when necessary.

Many financial experts recommend rate shopping when applying for a mortgage. If you fear hurting your credit score—don’t. You can successfully shop for a mortgage loan without damaging your credit score. This is because credit scoring systems are designed to recognize actions that are characteristic of rate shopping. Furthermore, FICO scoring models don’t penalize consumers for being smart borrowers. The secret, however, is requesting multiple quotes within a specific window of time.

In the case of comparison shopping for a mortgage, similar inquiries that occur within a 45-day period are counted as a single inquiry for scoring purposes. A mortgage pull can take five points off your score. So if you apply with 10 mortgage lenders within a 45-day window, rather than lose 50 credit score points, you only lose five points.

Understand that this provision typically only applies to mortgages and auto loans. So while you wouldn’t want to apply for too many credit cards in a short span of time, you can apply for as many mortgages as you like within a six-week period.

There are different types of mortgage products available, each with its own set of terms. When applying for a mortgage, it’s important to understand the ins and outs of the loan. Since a mortgage is a big commitment, you should only agree to terms you’re comfortable with.

To avoid mortgage problems or regrets, here are five mortgage terms you might skip.

1.Interest-only home loan

Interest-only home loans were popular in the mid-2000s. With these loans, many people purchased a property and only made interest payments for the first few years of the mortgage term. This approach helped many afford homes as prices skyrocketed. The problem, however, was that mortgage payments would nearly double once interest-only payments ended. Many borrowers couldn’t afford their new payments and this triggered a string of foreclosures.

These products disappear, but have recently made a comeback. Nowadays, some lenders only offer interest-only products on investment loans or jumbo loans. These loans have stricter qualification requirements, so buyers often need a larger down payment and excellent credit.

Even if you qualify for an interest-only mortgage, be aware that your mortgage payment will increase significantly in the future. If you’re unable to refinance at this time, you could get stuck with a monthly payment beyond your range of affordability.

2.Adjustable-rate mortgage

Adjustable-rate mortgages (ARM) aren’t the worse decision, but they can be risky. These loans have an interest rate that resets every year after an introductory fixed-rate period. ARMs are attractive because they start off with rates lowered than the average fixed-rate mortgage. This allows borrowers to enjoy a lower monthly payment and purchase more for their money. But because adjustable-rate mortgages are unpredictable, there’s the risk of interest rates increasing year-by-year. And when your interest rate increases, so does your monthly payment.

These mortgages aren’t as scary if you plan to sell or refinance the property before your first rate adjustment. But even you have a plan in place, there’s no guarantee you’ll be able to sell the home or refinance at a later time.

3.Prepayment penalty

A prepayment penalty is a clause some lenders include in their mortgages. This discourages buyers from refinancing or selling their homes within the first few years of the term. Fortunately, lenders can only impose a prepay penalty up to the first three years of a mortgage. Some prepayment penalties apply when a borrower refinances or sells the house, whereas others only apply when a borrower refinances.

A prepayment penalty doesn’t cost a dime if you keep the mortgage for at least three years. But if you pay off the loan sooner, this penalty could end up costing you several month’s of interest.

4.High interest rate

Every mortgage has an interest rate, and lenders take several factors into consideration when determining a borrower’s rate. When applying for a mortgage loan, it’s important to research and educate yourself on the competition to ensure you’re getting a fair rate. Understand, however, that people with lower credit scores typically pay more interest. A high rate means you’ll pay more on a monthly basis and over the life of the loan. You can avoid a higher mortgage rate by improving your credit beforehand. For example, pay down consumer debt, pay your bills on time, don’t cosign loans, and check your credit report for errors.

Mortgage refinancing is the process of getting a new home loan to replace an existing one. You’ll fill out a new mortgage application and the bank will check your credit. But although refinancing and getting an original mortgage are basically the same process, there are slight differences between these transactions.

1.You need at least 5% equity for a refinance

If you apply for a traditional refinance, your property will need at least 5% equity. There are no rules on the amount of equity needed when getting an original mortgage, although you can’t get an original mortgage for more than the value of a property.

When you buy a house, your mortgage lender sends an appraiser to the home. If the appraiser determines that the house is worth $200,000 and you agreed to a sale price of $200,000, you can proceed with the mortgage despite having minimum equity. This isn’t the case with a traditional refinance.

There are options for refinancing a property with little or no equity. If you’re eligible for the Home Affordable Refinance Program (HARP), you can refinance up to 125% of your property’s value. But this option isn’t available to everyone. To qualify, your home loan must be guaranteed by Freddie Mac or Fannie Mae.

2.You don’t need a down payment with a refinance

Typically, a down payment isn’t required when refinancing a mortgage loan, although you can give the bank a down payment. The only time a lender requires money down with a refinance is when the value of a house is less than the mortgage balance.

When you get an original mortgage for a new purchase, the mortgage lender will almost always require a down payment between 3.5% and 5%, depending on whether you’re getting an FHA home loan or a conventional home loan. Some home loan programs do not require a down payment, such as a VA and a USDA home loan. But you have to meet specific requirements to take advantage of these products.

3.You have different options for managing closing costs

There are closing costs regardless of whether you’re getting an original mortgage or refinancing. In some cases, you don’t have to pay closing costs out-of-pocket.

With a refinance, the lender can wrap closing costs into the mortgage loan, or the bank may pay your closing costs if you agree to a higher mortgage rate. Likewise, there are ways to avoid paying your own closing costs when applying for an original mortgage. If you get a conventional or an FHA home loan, both options allow sellers to contribute a percentage to your closing costs. Additionally, an FHA home loan lets you include closing costs in your mortgage balance.

4.Refinancing changes the terms of an original mortgage

One of the biggest differences between these transactions is that refinancing changes the original terms of your home loan. As mortgage rates drop, you can refinance to a lower interest rate and take advantage of a lower monthly payment, which frees up cash for other purposes. Refinancing is also a way to switch to a completely different mortgage product. You can convert an adjustable-rate to a fixed-rate, reduce or extend your home loan term, or switch from an FHA home loan to a conventional loan.

If you want to buy a house, the sooner you gather your financial paperwork, the sooner you can apply for a mortgage. A home is a major purchase, and since the bank is lending hundreds of thousands of dollars, you’ll have to provide the loan officer with countless documents. In fact, the amount of paperwork involved with a home purchase is more than what most landlords request.

It doesn’t matter who you are or what you do, you’ll have to supply copies of your tax returns for the past two years as evidence of consistent income, plus you’ll need to hand over your pay stubs from the past 30 days. The lender also pulls your credit report and reviews your bank statements for the past two months to get an idea of how much you have in reserves for your down payment and closing costs.

This information is usually enough to assess whether you qualify for a mortgage. But sometimes, underwriters request additional information from borrowers. If this happens to you, there’s no reason to panic. It’s the underwriters job to calculate your risk, and to do this, he needs a complete understanding of your financial profile. If you get a call from the lender requesting additional information, provide this information as soon as possible to avoid any delays.

But what type of additional information may an underwriter request? Here’s a breakdown of possible reasons why your lender may request additional documentation from you.

1. You have an unusual deposit in your bank account

Your mortgage lender needs to see at least 60 days of bank statements from all your accounts. Getting a mortgage involves closing costs and a down payment, and the bank needs to know how you plan to cover these expenses.

When reviewing your bank statements, the underwriter will specifically look for any unusual large deposits within the past 60 days. If you have suspicious deposits into your account, the underwriter will call and ask for an explanation. Be prepared to provide documentation for any inheritances, settlements, or work bonuses you receive. If you receive a large deposit as a gift for your down payment, the lender will need a gift letter from the giver.

2. You’ve had a divorce

This might come as a surprise, but if you’re divorced the lender will likely need to see a copy of your divorce decree. It doesn’t matter how long it’s been since the divorce. This information is important because the divorce decree has information that doesn’t appear on your credit report, such as specifics about support payments.

If you’re receiving alimony or paying alimony to an ex-spouse, the lender needs this information to accurately calculate how much you can afford to spend on a property. And don’t think you can hide a divorce from the lender. The bank will run a background check, which will reveal past martial statuses.

3. You’re not a U.S. citizen

When applying for a mortgage, the lender will typically only ask for a copy of your drivers license and you’ll have to provide your Social Security number on the application. Understand, however, that if you check the box stating that you’re not a U.S, citizen, the lender will request a copy of your birth certificate.

4. You’re self-employed

If you’re self-employed, lenders will use your previous two year’s tax returns to determine mortgage eligibility. However, some lenders may also request a year-to-date profit and loss statement. This is more likely to happen if you’re purchasing a property after the first quarter of a new year. Since you don’t have paycheck stubs like an employee, the lender uses this statement to verify your current income.

5. You’ve had a short sale, bankruptcy, mortgage modification, etc.

A lender may also request additional documentation if you’ve had a previous short sale, bankruptcy, mortgage modification or foreclosure. This information appears on your credit report, but the lender may need to know specifics about the transaction. So don’t be surprise if the underwriter requests a settlement statement for a short sale, trustee sale information for a foreclosure or statements that explain the details of a mortgage modification and bankruptcy.

As you look ahead to the future, you might be somewhat apprehensive about retirement. On one hand, you look forward to this time in your life. But on the other hand, you worry about having enough income after leaving the workforce. These type of concerns are understandable; and the fact that you’re thinking ahead proves you’re financially savvy.

The truth is, some of the decisions you make today will have a tremendous impact on your later years. And while you may not draw a connection between buying a home and retirement, the way you approach homeownership can affect your future. And unfortunately, some home buying mistakes can hurt your retirement.

1. Buying too much house

You work hard, so it’s understandable why you’d want to purchase your dream house. Home is a haven, and you deserve to have everything you’ve always wanted in a house—your own private paradise. But it’s also important not to buy “too” much house.

You shouldn’t buy a house at the expense of saving for retirement. Retirement planning should be a priority. The earlier you start saving, the better. A mortgage lender may approve you for a large amount, but you need to ask yourself an important question: Will spending more and buying a larger home interfere with my ability to prepare for retirement?

Putting all your money into a house is dangerous because you may have little—if anything—left to prepare for the future. Sometimes, less is more.

2. Tapping your retirement account for a down payment

If you have a 401(k) or an individual retirement account, you’re allowed to borrow money from these accounts as down payment on a house. But although the money is available, make sure you weigh the pros and cons.

Taking money from a retirement account reduces earning potential. As a result, there’s a chance you’ll retire with less than you need. Unless, of course, you’re disciplined and able to repay what you take. If you’re young, you might have plenty of time to repay yourself and keep your retirement plan on track. But if you’re middle-aged or retiring in the next 10 or 15 years, consider other ways to get funds for a down payment. For example, some community banks offer portfolio loans which require zero down, or you may qualify for local grant programs that offer down payment and closing costs assistance. Talk with your lender or realtor for information.

3. Paying off a mortgage early

Paying off a mortgage before retiring can significantly reduce your monthly expenses, which means you won’t need as much income in retirement. This can remove some of your financial stress, allowing you to retire without the heavy burden of a mortgage on your shoulders. However, you should only pay off a mortgage early when extra payments don’t interfere with retirement planning. The same way you shouldn’t buy “too” much house at the expense of your retirement account, you shouldn’t pay off your mortgage at the expense of your retirement account.

Rather than put extra money toward paying off a mortgage early, you could put this extra money toward maxing out IRA or 401(k) contributions. This approach can grow your retirement account substantially, providing enough income to sustain you after retiring.

Different variables affect borrowing capacity when applying for a mortgage loan. Loan officer and underwriters take different factors into consideration, such as your income and current debts, and then determine what you can realistically afford. Unfortunately, some borrowers are pre-approved for less than anticipated. The good news is that there are ways to increase borrowing capacity and qualify for a larger mortgage.

1. Claim more of your income on your tax return

When applying for a mortgage loan, the lender will not only request your most recent paycheck stub, the bank also looks at your tax returns from the past two years and uses the average of both years to decide how much you’re eligible to receive.

At the end of the day, it doesn’t matter how much you “say” you earn, lenders determine qualifying amounts based on what’s on paper, so it’s important to claim a sufficient amount of income. This is especially important if you’re self-employed and write off several business expenses. While your business expenses may be legitimate and allowed, the more expenses you write off, the lower your income appears on paper.

If you’re planning to buy a house in the next couple of years, consider limiting your number of write-offs to boost your net profit. You’ll pay more in income taxes for these years, but a higher income makes it easier to qualify for a mortgage and increases borrowing capacity.

2. Add your spouse to the mortgage

If you’re the breadwinner and your spouse only works part-time, you might look into getting a mortgage in only your name. This is an option, but if your income alone limits borrowing capacity, considering adding your spouse’s name to the mortgage. Even if your spouse earns a lot less than you, a joint mortgage can work in your favor. This is because the lender will use your combined incomes to determine how much you can afford.

Of course, the bank will also pull your spouse’s credit score and use the lower of your two numbers to determine the mortgage rate. Therefore, it’s only a good idea to add your spouse to the mortgage if he or she has good credit.

3. Lower your debt

Paying off credit cards and other loans also increase borrowing power. The amount you receive for a home purchase is affected by how much you owe elsewhere. Your total debt payments (including the mortgage payment) should not exceed 36% to 43% of your gross income. If you have auto loans, high credit card payments and personal loans, these debt payments can push your total debt-to-income ratio close to or over the limit, which affects how much you receive from a mortgage lender. For example, after looking at your current debts, a lender may conclude that you can only afford to pay $1,000 a month for a mortgage. However, if you paid off some of these debts, you might increase borrowing capacity by a couple hundred dollars a month, helping you afford a mortgage of $1,200 or $1,300 a month.

4. Increase your credit score before applying for a mortgage

Getting the lowest mortgage rate possible can increase borrowing capacity. One of the best ways to ensure a low rate is to improve your credit score before borrowing. You can qualify for a mortgage loan with less than perfect credit. You only need a score of 620 for a conventional loan, and a score of 500 for an FHA loan. Just know that a low credit score can result in an interest rate that’s one or two percentage points higher than the rate offered to someone with excellent credit. A two-percent difference increases your mortgage payment and limits how much you’re able to borrow.

5. Choose the right kind a mortgage

You can also increase borrowing power by selecting the right type of mortgage loan. Traditionally, home loan payments with a conventional mortgage cannot exceed 28% of a borrower’s gross income. If you were to apply for an FHA home loan, you can get a mortgage payment up to 31% of your gross monthly.