Obtaining pre-approval of a home loan is among the early things you should do when planning to purchase a house. Knowing how much home you can afford in advance, allows a person to refine his/her search. Here is what goes into determining home loan qualification amounts.
Your Income Lenders will examine your credit, income, assets, liabilities and credit score in order to determine how much you should be given. One of the most significant influences is the level of income. Most lenders prefer that the sum of your monthly debts does not exceed 36% of the gross monthly income for you to be eligible for a mortgage. They may allow ratios up to 43% in some circumstances.
The type of income that you have will also be looked at by the lenders. Ordinary income from paid full-time employment is preferred. If your income is unpredictable due to bonuses, commissions, overtime, unemployment, disability, alimony payments, etc, that is considered as well. The lenders are likely to approve the mortgage if the borrower has stable sources of income for the last two years.
Your Assets Mortgage companies are interested in your ability to pay for a home thus they need you to show you have enough assets and cash for a home. Down payment is usually expected to be between 3% to 5% of the purchase price by most lenders. Some also expect you to have between three and six months of mortgage payments in savings as reserves after signing the papers. You may also show proof of investment in retirement accounts and other investments to show that you are financially stable.
Your Credit Scores Nevertheless, the importance of credit scores cannot be overemphasized when it comes to mortgage rates and loan amount. It is common to set your credit score at 620, because anything below that is not accepted by most of the lenders, although you will be offered better rates if your credit score is 740 and above. It is useful to review the credit reports in the three credit bureaus and clear any discrepancies before seeking a pre-approval. It is also equally important not to apply for any new credit, and pay down balances in the months leading up to your home purchase.
Your Debts Your credit score will be determined by the amount of monthly instalments that you are required to pay compared to your income. Besides your probable new mortgage payment, expenses such as credit card balances, automobile loans, student loans, and any other installment obligations are taken into consideration. Generally speaking, aspiring homeowners should ensure that their total monthly obligations, including an approximate monthly mortgage payment, should not surpass 36 percent of their gross monthly income. Yet some borrowers can qualify with numbers in the 40s.
The Loan Program FHA loans are particularly preferred by first-time buyers because the government supports them and requires as little as 3. 5% down payment. Conventional loan have higher down payment ranging from 5% to 20%. VA and USDA loans are the other options that may involve low or even zero down payments depending on the borrower’s qualifications. The loan program that is in place determines the minimum down payment requirements and as such impacts the qualification of the loan amounts.
Interest Rates Interest rates on mortgages fluctuate, and often on a daily basis. This means that the higher the rates, the lower the amount of money that you can borrow when you apply for the loan. When rates go up, the lender has to ensure that your income and the assets you have can pay the higher interest rate on the same amount of loan. Purchase loan pre-approval when interest rates are cheaper to get the most from your loan.
The Property Of course, if you want to be able to borrow money on jumbo mortgage above conventional loan limits, you will require a higher income and down payment. However, the price of the home you are looking forward to purchasing also influences the amount of loan to be offered. In hot markets you may find that the appraised values are lower than the listed prices, which would in turn mean that the amount you qualify to borrow would also be lower.
Pre-approval Vs Pre-qualification A common error home buyers make is that they mix up pre-approval and pre-qualification numbers. Pre-qualification does not entail a tough credit search and is based on what you say about your financial standing. Pre-approval includes verification of income, assets, a credit check, and underwriting. The pre-approval letter tells the most accurate potential of what one can qualify for a loan from the financier.
Improve Your Qualifications If current guidelines state that due to your circumstances, you only meet the criteria for $200,000, then it’s advisable to improve your chances before applying. Reduce the debts, save more money for a larger down payment, or apply when one has a better job. Small variations can move you to the next loan product or interest rate range to be eligible for.
Shop Multiple Lenders Every lender post guidelines and standards for mortgage loan qualification. Also, loan programs, credit score, and debt to income ratio may differ. Submit your application to multiple lenders in order to obtain the most suitable loan for you. Another aspect that one should also compare when coming up with the best lender is the total closing cost.
House hunting is less stressful when one is aware of the type of houses or homes one qualifies for in as much as financial ability is concerned. Shop for the final product once you have preapproval. After that, filter the results only to homes in your set and approved price bracket.
