Qualifying for Home Loan
In life, there are certain events that are considered milestones, and one of them is buying a home. But getting a mortgage to finance that purchase can be a very stressful and a very confusing process. Here are some of the considerations that lenders have when analysing an application for a home loan. These are qualification criteria and being prepared as well as knowing them can make a person on the right track towards getting approved.
Your Credit Score
The score that most likely determines your qualification to a mortgage is your credit score. Conventional home loans call for a minimum credit score of 620 to 640 among most lenders. The higher the score, the better the loan terms and interest rates to which you have access to. To get the best rates, you need to have a score of above 740. Notably, credit score should be enhanced, which can only be done by paying debts on time and showing good credit history.
Your Debt-to-Income Ratio
The lenders are interested in knowing if your income is sufficient to cater for the monthly installments of the mortgage and other obligations. They come up with a debt-to-income (DTI) ratio which is the ratio of monthly obligations to gross monthly income. The standard is that it should not be above 36% depending on the organization’s size and type. The lower your DTI ratio, the more assured the lenders are in your capacity to manage a mortgage. Reduce credit cards and loans to decrease the monthly installments.
Down Payment Amount
Down payment is the portion of the price of the property that a purchaser pays without financing the balance through a mortgage. The down payment, though, may not be less than 3%-5% for the traditional loans, while it may be as high as 20% for conventional loans to avoid the cost of the private mortgage insurance. The more that can be put down as a deposit the better. It is also important to note that a 20 percent down payment affords you the best rates and offers no mortgage insurance.
Your Employment and Income
Banks want to ensure that they will receive regular payments from you and the best way to guarantee this is by having a steady source of income through employment. Ideally, that employment has been consecutive and regular for at least the last two years. Include the most recent pay stubs and the W-2 and/or 1099 tax form to show proof of income. Any large deposits into your bank accounts will require documentation to confirm the source of the money.
Your Savings and Assets
Besides, to ensure your financial reliability, before approving a loan, lenders want to see that you have enough money and assets. The more reserves you have, the less risky a borrower you are in their perception. The majority of programs expect you to have at least two months of mortgage payments as a reserve after the closing. Checking/savings account balances, retirement fund, stocks, bonds, etc. are part of the assets.
Your Credit History
Credit history is the story of your performance as a borrower in meeting your previous obligations and expenses. Lenders will pull your credit reports from the three credit bureaus to look for any previous late payments, collections, judgments, bankruptcies, or foreclosures. Ensure your payments are on time and reduce incidences that can raise flags when qualifying for a mortgage. If you have repaid your credit the right way in the past, then others’ bad credit experiences are not necessarily bad news for you.
Preparing the Paperwork
This is because most of the documents that you will need when procuring the loan will be easily accessible. Be ready to submit the paycheck stubs or proof of income, bank statements, W-2 or 1099 forms and for the last two years federal tax returns. It is requested that your loan officer can give you a list of documents that should be provided at your disposal. The more the application paperwork is compiled, the sooner a decision concerning approval can be reached.
Debt-to-Credit Ratio
Another thing that lenders consider is the debt to credit ratio apart from the debt to income ratio. This measures sum total of all your liabilities against the sum total of all your credits. Even if borrowers meet DTI standards, the lenders may decline home loans to borrowers who utilize more than 30%-40% of their credit limit. Avoid having a high utilization rate on credit cards before applying.
Home Purchase Price
Banks and other financial institutions will qualify you for a maximum mortgage loan depending on your earnings, wealth, credit rating among other conditions. In general, borrowers are expected to demonstrate that their total obligations for their housing costs, including the proposed mortgage payment, property taxes, insurance, and HOA fees cannot be more than 28% of their gross monthly income. The purchase price of the home has to be adjusted to fall within these ratios.
Down Payment Sources
The source of your down payment money matters a lot. Lenders ensure you have valid sources of these funds such as savings and checking accounts, mutual funds, pension/retirement funds, gifts, sale proceeds from real estate, etc. Some signs to look out for are large deposits that have not been recorded and down payment money that has been borrowed. Source your deposit properly right from the start.
Interest Rates
The current interest rates that are in the market at the time of applying for the mortgage determine the amount of house one is eligible to buy. When interest rates are high, the price span is low; when interest rates are low, you can pay for high prices. Identify current movements and possible future trends in the rate to be compared. It can confirm the monthly payment you have planned for and is a good way to lock in a rate early.
The Mortgage Type
Other government insured home loans include the FHA, VA and USDA loans with liberal qualifying measures meant for affordable housing. These programs entail low down pay and accept credit score compromise. It has higher credit scores and initial documents’ demand than conventional loans but has lower interest rates. Browse through the different mortgage program choices for suitability with your circumstance.
Pre-Approval Letter
Obtaining a pre-approval letter from the lender before starting the home search process is advisable. This letter is to inform you that you meet the requirements for a mortgage based on a preliminary review of the application and the down payment. Sellers like buyers who have financing approvals because funding is not likely to fail.
Shop Multiple Lenders
By applying with several lenders, you get multiple pre-approval offers that you can then use to make comparisons. It is important to note that the rates, fees, and qualification requirements differ from traditional banks, credit unions, and online lending services. Expanding the set of choices increases the likelihood of selecting the best course of action. This is especially important because multiple hard credit checks in a short period will only shave a few points off your score.
To obtain a home loan there is a little bit of discipline that needs to be exhibited as far as financial aspect is concerned but getting qualified is very possible if you set your goals rightly. Focus on improving your good credit history, debt ratios and the down payment amount. Talk to credit and housing counselors who will help you in the process. You will soon be able to get pre-approved and start visiting your favorite homes.
