But while shopping for the home for which you would like to borrow money, one of the most important things that you will need to know is the amount of money for the home loan that you can apply for. It is easier for you to set the correct budget when you have a clear picture on the loan amount you intend to take. Well, what do pre-approval and pre-qualification mean, and which factors are taken into consideration by lenders when determining the maximum amount of home loan a borrower can qualify for?
Your Income Banks will use gross monthly income as one of the ways of estimating the maximum amount of money you can afford to be charged for the loan. They use your income to come up with your debt to income ratio. This ratio is standard acceptable ratio below 43 percent. Therefore, if your monthly income is $5,000, the maximum amount you can borrow will be what in return a monthly payment less than $2,150 per month. A higher and more fixed income results in a higher likelihood of being granted a bigger loan amount. If you have frequent changes in income or witnessed drastic changes in your earnings pattern in the last two years, loans may be estimated by averaging the income over the last two years.
Your Credit Score Among the main determinants that dictate the likelihood of approval as well as the amount of funding the borrower is capable of accessing is the credit rating. This means that the higher the score, the less likely the client is to default on the loan and consequently, less risky for the lender. The best home loan rates and terms are available to people with a credit score of 720 or higher. Your opportunities will be limited if your score drops below 620. If you can, get a copy of your credit report and try to boost your rating before you apply for home loan preapproval. It helps to pay off outstanding balances, refrain from applying for new credit in the run up to the application.
Your Total Debt Lenders will also scrutinize your current loans and credit card balances to see how much more credit risk you are capable of handling. If you have huge amounts of outstanding dues like car loans, personal loans, credit card balances where you have to pay hefty amounts as interest every month, then your loan eligibility amount decreases in proportion to the amount owed. To increase your debt-to-income ratio, you should, if possible, clear all the toxic debts with high-interest rates. Pay attention to your arithmetic because even paying a portion of the credit card balances can be beneficial.
Your Down Payment Capacity The down payment is the initial cash that you have to come up with towards the purchase of your home. Normal home loans come with a provision that a borrower must pay at least 20 percent down payment. The higher the down payment then your chances of being approved for bigger loans, at better rates are also higher. It shows your credit worthiness to the lender on the intent of the home buyer. FHA loan requires a down payment of as low as 5 percent, using which you will have a higher shot at being approved for the loan amount you desire as compared to not putting down any amount at all. Hence, begin to save as early as possible and consider your ability to make down payment while planning for the home purchase.
Loan To Value Ratio Loan-to-value ratio is the ratio of the loan amount that you have planned to take in relation to the lesser of the sales price or the appraised value of the home that you have planned to buy. With down payments of 20 percent or higher, the LTV is lower and thus less risky for the lender, allowing you to secure bigger loan rates. LTV or loan to value ratio is the ratio of the loan amount to the value of the asset being purchased; therefore, when your LTV ratio is low, you will easily secure approval for the needed funding. Mathematically calculate the right price range that can be sold to search homes in so that the intended down payment yields the best LTV ratio.
Other Factors Affecting the Loan Approval Amount Alongside the major factors above, lenders do consider a few additional aspects for loan approval decisions:Alongside the major factors above, lenders do consider a few additional aspects for loan approval decisions:
• Stable jobs and longer duration of working in a particular firm or organization has less risk – R. The self-employed category requires proof of income in addition to the necessary documentation.
• Your savings and reserves – A cash reserve that is equivalent to three months of mortgage payments should be available in the event of an emergency lends more security to the lender in case of default.
• Your current debts and obligations – Any outstanding loans, mortgage, credit card balances, you owe for alimony or child support will cut down your eligibility amount.
Steps to Go for Pre-approval to Obtain the Most Favourable Interest Rate It is advisable to obtain a home loan pre-approval letter from the lenders before hunting for a home. Pre-approval is more comprehensive than pre-qualification and assures you of loan approval as well as the current interest rates for a certain time. Thus, when you have a written approval for a particular loan amount, you can offer and negotiate with the sellers of homes more effectively as well.
To determine the maximum you can qualify for and get your desired pre-approval, do your homework first:To determine the maximum you can qualify for and get your desired pre-approval, do your homework first:
• Try to work in one job at a time and earn a regular salary without changing the job or company whenever possible.
• It is also advisable to check and improve credit if necessary prior to the actual search.
• Besides that, determine the total of your monthly obligations and eliminate unnecessary costly credit charges.
• Put aside little by little each month towards your down payment kitty.
• It is also important to compare the rates offered by different lenders to secure reasonable ones.
To increase your chances of getting approved for larger loan quantities towards the home purchase, home buyers should follow disciplined processes and come well prepared.
