The first question that you likely pose when you embark on this journey of buying your first home is “how much house can I afford?” Before you begin your search for a home or make an offer, it is important that you understand the parameters of your home buying power. For first time home buyers, getting pre-approval for a mortgage is one of the initial significant steps one can make. Here are the things you should understand the process of getting a home loan approval, how much of a loan you may be approved for, and factors affecting the home loan approval.
Who Is Eligible for a Home Loan?
There are numerous considerations that lenders make when approving a mortgage loan and the amount that a borrower can borrow. Key criteria lenders evaluate includes:Key criteria lenders evaluate includes:
Your income – Lenders desire to see stable income that would enable you to pay back the loan. These can be from a source such as a job, investments, retirement benefits, social security or any other form of wealth. Some groups of borrowers, such as self-employed, may need to submit additional documents; however, they can still be approved.
Your recurring debts – These include credit card balances, student loans, auto loans, other existing mortgages as well as all other installment loans; the underwriters will verify that you have sufficient monthly income to meet the mortgage payment. The total amount that you are likely to pay every month in order to meet all your debt obligations should not exceed 36% of your gross income.
Your credit rating – The higher your rating, the more favorable the mortgage rate you can obtain. Standard credit scores can range from 620 to 640 depending on the type of loan that is being applied for. Nonetheless, borrowers with credit scores of 700 and above can comfortably secure the lowest rates. To ensure that one does not have to pay thousands of extra money in interests, it is wise to start early to make improvements to his or her credit score before applying for a mortgage.
Down payment – The down payment is the portion of the purchase price that you pay at the time of the transaction and which is not financed through the mortgage. In general, the greater the down payment, the more favorable the mortgage rate because you are financing less. It has been established that first time home buyers are eligible to Low down payment programs taking as low as 3-5%.
Other assets – Lenders may wish to see that you have some cash left over after paying for the home in case of any emergencies or other expenses. It also requires the latest two statements from the bank.
Pre-Approval Vs Pre-Qualification
First-time homebuyers can get pre-qualified and sometimes pre-approved before applying and submitting all necessary documents to receive an approximate figure of their mortgage. Pre-qualification employs simple data such as income, debts, credit scores to arrive at likely loan alternatives. Pre-approval involves verifying personal and financial information and can guarantee a mortgage rate for 60-90 days in some instances.
Apply for pre-qualification or pre-approval from as many different mortgage lenders as possible. This is a process of choosing the right lender besides identifying the most suitable loan program to go with. To the sellers, pre-approval also demonstrates to them the extent of your seriousness when making an offer.
How Large a Mortgage Can I Handle?
A well known guideline concerning the house payment is that the payment should not be more than 28 percent of your gross income. This will help you also ensure that you have enough income that will cater for other expenses and savings each month.
According to this concept, mortgage calculators will help you to estimate your affordability of a home price or loan amount. For instance, let’s say you receive $6,000 per month before deductions, 28% of this sum is $1,680. This means $1,680 could be used for your total monthly housing expenditure.
Other rules state that one should spend no more than 1/3 of the gross income on rent or housing. But if you try to spend only 28% or less, then you should be able to provide for all the additional, unforeseen expenses that might occur and spend the rest of the money on other necessary things.
Debt-to-Income Ratio
The numbers that are being considered when obtaining a loan are one of the most crucial and that includes the DTI, or the debt to income ratio. This compares the cumulative of the debts that you pay in a month to the sum total of your month’s gross income.
As mentioned earlier, most programs demand that your DTI should not exceed 36 percent. FHA loans for instance, permits total debt ratios up to 50% in some circumstances. The lower your current debts to income ratio, the higher mortgage amount and better rate you will be able to qualify for.
Down Payment Amount
Lending institutions may consider you less risky if your down payment amount is greater, so they may approve you for a higher loan amount. Minimum down payments vary:
Conventional loan requires a minimum down payment of 20%.
If you’re looking for an FHA loan, it requires only 3. 5% down.
VA and USDA loans are two programs that allow for 0% down for approved applicants.
Although higher down payment enables the borrower to qualify for a larger loan, do not use all your savings to make the down payment. You need reserves too. Most programs accept down payments as low as 5% or even less, which makes it easier for first-time buyers to secure a mortgage.
What is better 30 or 15 year mortgage loan?
There are standard forms of mortgage loans and they either last for 15 or 30 years. The main difference is that with a 30 year mortgage you would pay less every month but more in interest over the duration of the mortgage.
A 15 year mortgage has slightly higher monthly payments but lower interest rates and you create home equity because you pay off the loan sooner. Refinancing later is also possible in case of necessity, that is why it can be considered as a great opportunity.
Discuss with your lender total amount of interest and monthly payments fit best for your home buying plan and budget.
Some Of The Strategies That Can Help Get A Home Loan Approval.
Following best practices when applying for a mortgage improves your odds of success:Following best practices when applying for a mortgage improves your odds of success:
Shop around for lenders and then submit a complete application with just one company. This gives you some time to consider your options without having several hard credit checks on your file.
Get pre-approved – This gives sellers the confidence that you are serious as a buyer when making offers. It also tends to approve mortgages that have a fixed interest rate of 60+ days usually.
Eliminate high balances – Lowering credit card balances and other revolving debts before applying for a loan can improve the scores and get a better mortgage rate. It is advisable to repay any unpaid debts or mistakes to the maximum in order to increase the scores.
Be sure to put aside money for those initial expenses such as downpayment and closing costs. Banks and other lending institutions will insist on evidence that you have cash on hand.
Get together all the documents that may be necessary such as income statements, tax returns, bank statements, and all documents concerning debts. This makes for a smoother application process without any delay in providing any other extra requested documents later that might affect your rate lock period.
Explain your circumstances - For instance, if you work as a teacher and receive your income in installments depending on the academic year, explain how you budget when you are not paid for several months. It is important to be truthful with your income.
Take a cosigner – This is especially useful when the borrowers have a short credit history. Or those with stable income but high credit utilization can always fix DTI problems with a cosigned too.
Shop Around With Multiple Lenders
In order to understand your overall home loan approval status and the best mortgage rates that are available to you, it is beneficial to get pre-approved by several of the top ranked lenders. This enables you to consider different customized solutions along the lines of your financial situation before submitting comprehensive applications. Don’t forget to obtain quotations for any possible loan rebate schemes as well.
Some of the places to consider pre-approval include online lenders, credit unions, banks, and mortgage brokers. They can assist in finding the most suitable loan programs that you are eligible for within the different lenders.
By ensuring that one observes the right procedures when applying for pre-approval and considering the various monthly expenses will give the best indication of the most feasible price range and the amount borrowed in the first home purchase.
