09 Mar Buying a Home? 3 Keys to Qualifying for a Mortgage
If you’ve decided to join the ranks of home ownership, chances are that you’ll be financing your new home in Chautauqua, Bemus Point, Lakewood or any other place. When buying a home, most homebuyers secure a mortgage when they purchase a house, and with rising home prices and low interest rates, it shouldn’t be much of a surprise.
But landing a home loan isn’t a guarantee. Mortgage lenders have strict criteria for qualifying for home financing, and, after the foreclosure crisis of 2008, there are more regulations than ever to make sure those criteria are enforced. In other words, it’s not as easy as it used to be.
The good news is that the criteria is fairly clear, and there are only a few things you must have to be credit worthy in a lender’s eyes. When you’re buying a home, here are three keys to qualifying for a mortgage.
Lenders determine your ability to afford a house payment based on your income relative to your housing expense and to your overall debt obligations. Because home loans are backed by government-sponsored corporations, the income-to-expense qualifications for about 80 percent of all mortgages are the same. And they are simple formulas.
Your house payment should not exceed 28 percent of your monthly gross income. If your monthly mortgage payment is expected to be $1,000 per month, for example, you’d need to earn about $3,600 per month before taxes to qualify.
Also, the total of all your monthly debt obligations cannot exceed 36 percent of your total monthly gross income. You can calculate this ratio by adding car payments, minimum credit card payments, and student loan payments to your expected house payment and dividing by your gross monthly income.
Any moves you make to increase your verifiable income and/or lower your overall debt obligations improve your chances of qualifying for a higher payment.
Lenders measure risk in part by analyzing the market value of a home compared to the amount of the loan against it. If you were to buy a home worth $100,000 and were borrowing $80,000 for the purchase, your loan-to-value (LTV) ratio would be 80 percent. That’s the sweet spot for most lenders.
With 80 percent LTV, you won’t need private mortgage insurance and will likely get a better interest rate than if you went with a low down-payment program that requires only 10 or 5 percent down. The more money you have to put down, the less of a credit risk you are to the lender.
Because the risk to the lender is lower, it stands to reason that the more you are able to put down, the more likely you are to qualify for a mortgage. Keep in mind, too, that a higher down payment means a lower monthly payment, which can help if your income-to-expense ratio is cutting it close.
Your credit score
Another primary way a mortgage lender measures you as a risk is your credit score, which is an indicator of your past payment history. They use what’s known as your FICO (Fair Isaac Corporation) scores, then usually take the median score of the three credit bureaus that report scores.
Technically, to qualify for a conventional home loan today, you’ll likely need a score of at least 620. According to the FICO scale, however, 723 is the median score and 680 is usually considered the low end of “good” credit.
There’s a risk-reward factor for banks, too. When interest rates are low, lenders don’t earn as much on the money they loan, so they may be less willing to take on risk. Also, keep in mind that more attractive income-to-expense ratios and a higher down payment can sometimes mitigate the risk that a lower credit score represents.
Nobody knows your personal life as well as you do. You, and your partner, need to have a heart-to-heart to determine how much you feel comfortable paying. You may get pre-approved for a mortgage of $200,000 but, you don’t need to spend all of that!
The bottom line
Unfortunately, not everyone qualifies for the home loan they want. Understanding the three key factors lenders use to determine worthiness, though, might help when you’re trying to qualify for a mortgage.
Other articles for selling a home that may be interesting.. “First Time Home Sellers – 5 Real Estate Tips”, “Sell Your Home Fast – 5 Tips to Create Home Listing Photos”
If you are considering buying a house, you may want to read “10 Steps To Buying a House For The First Time Home Buyer” , “Buying a Home- Everything is Negotiable.” OR “First Time Home Buyers: How Much Home Can You Really Afford?”, “Is it the right time to buy a Home?”
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