Purchasing a home is considered one of the biggest achievements in life. However, the path of being granted a home loan is often complicated and, in a way, overwhelming to most home seekers. There are several prerequisites that lenders use to decide whether you are suitable for a mortgage. Familiarizing oneself with these points can assist in determining whether one may obtain financing at the point when they have decided to buy property.
Your Credit Score
The first aspect of credit that a lender considers is your credit report and credit scores. They wish to know that you have been able to manage past debts and bills in the right manner. In general, the better the credit scores of the borrower, the higher the chances of getting better mortgage rates and conditions. To qualify for a conventional mortgage, lenders search their database for FICO scores of above 620. The minimum can be higher for VA, FHA and additional jumbo loans. Although the traditional credit scores may allow you to borrow money at slightly lower interest rates, having scores of 740 or above makes you eligible for the lowest interest rates. If you have a poor credit record or the credit scores are below 620, you will be approved but at higher interest rates or with some special offer. Applying for a mortgage can be made easier and broader if credit and payment histories have been adjusted earlier.
Your Down Payment
The down payment means the part of the price of the house that you pay at the time of purchase in cash. It helps to decrease the principal of the mortgage which the borrower is to pay. The majority of lenders recommend that you make a reasonable down payment of at least 10 to 20 percent of the sale price. The more you pay down, the less the risk of lending to you, a fact that is obviously true. In a conventional 20 percent down mortgage, you might be able to avoid having to make a payment for private mortgage insurance. Other options are available also, for instance, there are 3. 5% down FHA loans or VA loans with no money down for eligible persons. The disadvantage of such programs is that these programs require payment of mortgage insurance. Finally, in case you have no cash for a large down payment, discuss with your lender about the other types of loans that are offered with less cash down.
Your Income
It is expected that lenders want to be sure that mortgage applicants have a regular and sufficient stream of income to service their monthly installments. Most recommend a debt-to-income ratio of not more than 36 percent of gross income for housing and total debt of about 43 percent. These ratios relate your monthly installments on housing and total credit card balances to your gross monthly income. The income that is left after you have made these payments has to be adequate for living expenses. Other sources of income such as bonuses, investments or other one time income may not be considered. This is because wages and self-employment income sources are more likely to have consistency in the earnings history than any other source of income.
Your Employment History
As a supplement to reporting your income sufficiency, most lenders also require evidence of employment history. Stability in employment for the last couple of years gives assurance that the source of income would remain stable. Career breaks may require justification. New employment may necessitate presentation of job offer terms and expected earnings. Freelancers applying for a mortgage must submit business tax returns and business financial statements. Certain requirements are set out depending on what kind of work you do and how long you have been in the job.
Your Housing Payment Ratio
As highlighted concerning debt-to-income ratios, there is the question of what share of income will be channeled towards a new monthly payment for housing. This consists of the amount borrowed plus interest, taxes, insurance and any other fees such as those to homeowners’ association. Typically, most lenders limit this expense ratio at 28% of your gross monthly income for conventional financing beyond 80% LTV. The government backed and specialty loan programs may still enable the ratios closer to 40%. The lower the percentage, the lower the financial risk associated with you or your company. When one spends a significant portion of his/her income on housing, other essentials become a challenge to meet.
Your Asset Reserves
In addition to the down payment funds, the lenders ensure that the applicants have sufficient cash reserves after closing. These liquid assets are like an emergency fund to pay the mortgage in case you lose your job or any other form of income. It is common for lenders to insist on having reserves amounting to at least six months of housing costs. If your income varies, extra reserves may be necessary. The checking and savings accounts are typical examples of forms of identification of assets which are maintained in the account. Employer sponsored retirement accounts or investments can also qualify in some instances. The more one can demonstrate that he or she has excess savings, the better a candidate for a mortgage position.
Your Property Choice
When approving purchase loans, mortgage lenders assess the quality of the collateral, namely the real estate itself. The property should be appraised to be equal to or greater than the purchase price based on other similar homes in the area. It has to have some basic requisites in terms of safety, comfort, and structural integrity to qualify as an eligible property. Programs like manufactured housing or houseboats may also have certain limitations when it comes to financing. Your selected home has to bear relation to your lifestyle requirement and the cost aspect also is not to be overlooked. Housing affordability becomes a challenge when you live beyond your means in a house that is too big or too pricey.
Preparation and Groceries Shopping with Best Rates
Satisfying all these key conditions needs a bit of planning from the home shopping firm before engaging in the activity. Get your credit reports to review them and possibly fix any inaccuracies that are reported to national credit bureaus. Reduce other credit utilization and have prompt payment histories. Set some money aside for down payment plus closing costs. Ensure you have copies of your recent tax returns, bank statements and pay stubs. To make sure you get the best mortgage rate you need to compare the different lenders available and select the best one. The rates and fees differ and hence it is important to do research to get the best. Telling a lender your circumstances earlier gives direction on the potential loan amount and down payment requirements before you begin searching for houses.
