Without a doubt, mortgage lenders have tightened their standards after the recession, but if you think you won’t qualify for a home loan, THINK AGAIN! Buying a home may seem like a daunting process, but it can be a little less strenuous if you consider a few practical tips.
Around 80 percent of properties sold are primarily financed via home loans, yet it ultimately comes down to these basic principles that determine whether or not you might qualify for a home loan.
Giving your credit score a reality check
Your credit score is an important factor in the home loan qualification process. Some homebuyers are less mindful about how their credit score impacts the process. To create a reliability profile, lenders vigilantly analyze credit card and loan history and status to gage or not you have made payments on time, or there are any judgments against your open accounts. All these factors contribute to your credit score. Generally, lenders consider 680 or above a reliable credit score. Anything below 600 will most likely unfavorably influence the ROI. With a higher credit score, you may qualify for a better interest rate.
Income vs debt obligations
As a part of the qualification process, you are typically required to document your debt-to-income-ratio and provide at least two weeks of payroll receipts to the lender. In the event that you have multiple sources of income, you will need to submit the past two month’s tax return statements. The lender will assess whether you are spending less than 50 percent of your income on fixed expenses. If you have a running loan EMI (Equated Monthly Installment), it will most likely limit the size of mortgage you can afford. At the very least, experts suggest not applying for new credit during this process.
Determine your mortgage budget
How much house can you afford? As a rule of thumb, your total housing payments, including taxes, fees, and insurance, should not be more than 35 percent of your gross income. Monthly housing payments are subjected to mortgage payments, property tax, home insurance, and PMI (Private Mortgage Insurance).
Lenders use various methods to determine your creditworthiness. The loan-to-value and debt-service-coverage ratios determine home mortgage pricing. LTV refers to the actual equity that is available in the indemnity borrowed against the loan. Lenders anticipate the greater your down payment, the less likely you are to default on the loan. In today’s market, the lenders require you to pay 10 percent of the down payment, unless you are applying for an FHA loan – in which case the down payment can be as low as 3.5 percent, with a credit score even as low as 500. But if you can manage it, then consider putting 20 percent down to avoid PMI.
The DSCR (Debt Service Coverage Ratio) discerns your potential to pay off your loan, by considering the ratio of your net income to mortgage costs. If the DSCR ratio is higher, the probability of releasing your borrowed cost will be greater.
Your liquids assets are at times the real deal makers or breakers! Lenders require verification that the down payment is accessible in a liquid cash account, such as a savings account.
Lenders also look for steady cash reserves, especially when seeking a second home loan. This entails payroll receipts covering the last 30 days, two months of bank statements, and W-2s for the last two years.
A proficient lender should be able to guide you through multiple options. But knowing the requirements to qualify for a home loan can help you better understand and prepare for the process.