It is always advisable to get prequalified or preapproved for a home loan, which is among the initial processes you should undertake when planning for a home purchase. Pre qualification or pre approval enables one to determine the amount of money they are likely to borrow and prove to the sellers that they are capable of buying a certain home. But what does this magic home loan number mean and how do lenders come up with it? Here are some of the factors that you have to consider in the computation of your home buying budget.
DebttoIncome Ratio The lenders do not want you to be in a position where you are overwhelmed with debts. To measure this, they compute your debt-to-income DTI ratio by dividing your monthly debt obligations by your gross monthly income. This is your anticipated new mortgage payment plus car loans, student loans, credit cards, child support, and other installments. The standard threshold is
DTI of 36 per cent or less. For instance, if your total gross monthly income is 5000, then your total monthly payment on debts should not exceed 1800, which is 36 percent of 5000. In particular, a loan provider feels quite comfortable approving your loan when your DTI ratio is low.
Down Payment Amount Your down payment also attracts keen attention from the lenders since the more you are willing to put down; the less risk to them. There are conventional loans that require the borrower to make a down payment of at least 20 percent of the price of the homes. On a 250000 home, the down payment required is 20 percent, which means a 50000 cash payment at closing. However, a large number of lenders have devised loans that can be accessed with as low as 3% down payment for first timers only. The tradeoff is that these low down payment loans are more rigid in their guidelines and some such as FHA loans, require you to pay mortgage insurance.
Credit Score The credit score is also a factor that dictates mortgage eligibility among the applicants. The best terms are provided for those clients who have a high credit score of 740 and above. If your score is below 620, then you might face a lot of problems getting approved. Banks and other financial institutions consider your credit score as a measure of your previous performance in repaying credit and hence your chances of repaying the mortgage loan. To increase the chances of being approved for the best rate, ensure that you review your credit report and score at least three months before applying for preapproval and making any necessary corrections.
Other Monthly Expenses Lenders must know your financial situation in detail, therefore they will enquire about expenditures other than the loans and other liabilities. This is property taxes in the event they are not included in your monthly mortgage payment, homeowners insurance, association fees, child care, alimony or child support you have to pay, among others. Be ready to reveal and record these costs because they will be part of the preapproval amount.
Income Verification Underwriters need your latest pay stubs; W2 and tax return transcripts, and sometimes a letter from your employer. To be eligible for any bonuses, overtime, or any seasonal income, you must show that you have been receiving this for the last couple of years. It considers all forms of income, be it from wages or salaries, investments, social security income, pension, and any other fixed monthly receipts owed to you. Debt and income that you have from your spouse or partner will also be taken into consideration even if he or she will not be applying for the mortgage.
Debt Payoffs Certain potential customers clear the existing debts, loans, and credit cards to minimize the DTI ratio and enhance the credit rating before going for preapproval. This can go a long way in ensuring that you get the most out of your home buying power. However, do not go ahead and pay lines of credit shortly before applying or the lender may consider foul play and assume you are adjusting finances solely for the purpose of mortgage application.
Types of Loans There are various mortgages that one may qualify for, and each mortgage has its own qualifications. Down payments may be as low as 35 percent and credit scores are not as stringent as those required in traditional mortgages as is the case with VA loans, which require no down payment for qualifying veterans. Section 502 USDA Rural Development Loans and State Housing Finance Agency Loans are available to buyers with low to moderate income for specific regions. This may enable one to get more home than was originally planned through correct loan program selection.
Getting Prequalified Knowing what’s important when applying for a loan, you can now start discussing with lenders and getting preliminary approval. The prequalification process is fast and provides you and your real estate agent with an initial price range to begin the process of house hunting. You will provide more detailed information and formal identification for a preapproval letter at a later stage of the buying process. Preapproval indicates to the sellers that you are a credible buyer and a qualified borrower which makes your offer more credible.
How much you can borrow may also largely depend on your financial credentials and credit standing. Speaking to lenders before applying and even during the build up to homeownership is the most effective way of finding out whether one qualifies, not to mention enhancing one’s prospects. After this you will be clear on which price range is achievable when you search houses for sale online.
