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Becoming a new homeowner is exciting – there are many rewards and benefits that come with owning a home. What many need to know more about however, is what it takes to be qualified to buy a house.
These days, qualifying for a mortgage can be confusing, especially because of misinformation being spread around. Your co-worker(s), neighbor(s) and even your family will tell you all about what [they think] it takes. The fact is requirements change over time as do the guidelines that lenders follow.
Let’s review the requirements a lender looks at to determine whether you can qualify for a home loan. This information can be helpful not just for first-time buyers, but also for current homeowners who haven’t experienced getting a home loan for quite some time.
Credit
Your credit is one of the biggest things a lender looks at when you apply for a home loan. The length of your credit history, ability to pay loans, and whether you’ve maxed out your loans or credit cards will all come into play. These are the factors that determine your credit score or rating. Based on your credit score, a lender will be able to gauge the likelihood that you’ll be able to pay them back. Credit scores also determine the interest rate a lender will offer – a higher credit score often results in a better interest rate.
Along with your credit score, lenders will also take a look at your credit report. Some of the biggest factors they’ll look for are whether you have accounts open for at least a year, and whether or not you have any significant outstanding collections. If you have any sizable collections or judgments on your credit report, it’s best to settle these before you get financing. If you need help with repairing your credit because there are so many collections and judgments outstanding, consider professional help.
Your rental history will also be taken into account, even if it doesn’t show up on your credit report. Lenders take a look at your rent or mortgage payments over the past year or so – as little as one late payment can make it difficult for you to earn approval.
Down payment
The absolute minimum down payment required to purchase a home is usually 3% to 3.5% of a home’s total sale price. This will allow you to get a loan from the Federal Housing Administration, or FHA or a Conventional loan. These loans are a terrific option for first-time buyers or anybody who can’t afford a large down payment. With an FHA loan, you also won’t need to worry about not qualifying if your credit score is less-than-perfect. You will be asked to explain the issues and usually the loan is made.
In addition to down payment, it’s a good idea to set additional cash aside for settlement fees. The amount of settlement fees may vary depending on the type of loan or area where you plan to buy, so it’s best to ask for more information. I offer loans that allow you to finance the settlement fees for a higher interest rate.
Debt-to-Income ratio
Lenders will also take a look at your Debt-To-Income ratio, or DTI. Your DTI consists of your fixed expenses (mortgage payment, homeowners insurance, credit cards, property taxes, car loans, etc. ) with the new mortgage compared to your gross monthly income. Lenders usually want to see a buyer spending less than 50% of their income on these fixed expenses. There is some leeway so always ask me if there are alternatives.
Get pre-approved
Getting pre-approved for a loan is a smart move, especially for buyers in a tight market. Many sellers and their real estate agents want to know a buyer has been vetted properly before deciding to work with them.
Create a strategic plan
Do not assume you’re ready to buy a house – it’s very important to address any outstanding issues you may still have. Before you start looking for a home, you should consider consulting a real estate professional in advance. It’s always a good idea to start early, and working with a Realtor is a great way to solidify your plans, so you’ll have a strategy to follow.
If you’re planning to buy a home after a foreclosure, bankruptcy, or short sale, contact me at 760 622 5087, or send me an email at [email protected] or simply schedule a phone appointment here:
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