Congratulations on realizing that becoming a homeowner is more beneficial versus being a renter! Some of the benefits of homeownership is having a fixed monthly payment vs. fluctuating rent fees yearly, possibility of selling for a profit vs. not for profit and paying more for a place you’re just renting than owning it, set your own rules for your peace and enjoyment of living vs. landlord determining the rules.
All of the above is great, so now that we have to face reality and go through the process to get to that level of becoming a homeowner there are things that you should know about the qualification process before you take that step.
The financing of a home is a complex transaction. It involves many steps and you will speak with people performing specific functions and roles. Here is an example of the steps your lender will go through to process, approve, and fund your home loan. Depending on your preparedness, this process can take anywhere from 30 to 45 days, so it’s best to engage with a lending professional as soon as you are seriously looking for a home.
Think for a second of any family member or close friend that recently purchased a home. Contact them and ask them if they had a phenomenal experience with their real estate agent and home loan lender. If the answer is yes, ask them for their contact information and contact them. Choosing a reputable agent and lender that is referred to you by word of mouth of your family member or friend is way more suggested than just randomly picking one. You want your home buying experience to be as smooth as possibly to remember.
Hire the most thorough, licensed home inspector you can find to pinpoint any issues that could potentially end up becoming costly repairs. To avoid conflict, make sure your lawyer is not also representing the seller.
While mortgage underwriters look at a lot of different information to decide whether you’ll qualify for a mortgage, ultimately, it comes down to four things: credit, equity, income and assets.
Your credit is one of the most important things that will be considered when determining if you qualify for a home loan. For most lenders, the minimum score to qualify for a home loan is 620. If you have collections or judgments on your credit report, you will usually have to take care of those first before you can get financing the one exception to this is usually medical bills. The other thing that won’t show up on your credit report, but is verified, is your rental history. Lenders want to see if you’ve had any late rent or mortgage payments in the past 12 months. Any more than one late payment and you’ll have a tough time getting approved.
Down payment / equity The minimum required down payment when buying a primary home is typically 3.5 percent of the sales price, which will allow you to get an FHA loan – a great option for first-time home buyers or anyone who can’t come up with a huge down payment. FHA loans also don’t penalize you with a higher interest rate if you have less-than-perfect credit. When buying a home, keep in mind that you will not only need to have funds for the down payment, but you will also need extra cash for various settlement fees. These can range depending on the type of the loan and the area where you are buying. The good news is that home loan programs allow you to get a credit from the home seller to help pay for these settlement fees, as well as other costs, like your first year’s taxes and insurance.
Another reason looked at by lenders is your debt-to-income ratio (DTI). This is simply your fixed expenses with the new mortgage compared to your gross monthly income (income before taxes are taken out). Lenders typically want to see someone spending less than 50 percent of their gross monthly income on these fixed expenses, which include your mortgage payment, property taxes, association dues, home owners insurance, car loans, student loans, credit cards and any other fixed payments that would show up on your credit report. Variable expenses like utilities, phone and cable are not included in your DTI. But to get an even more realistic DTI you should include variable expenses that you pay monthly so that you know how much you can comfortably afford for a mortgage.
Lenders also want to see a good employment history and will verify your past two years of work. It’s much more difficult to qualify for a mortgage if you don’t work a typical “nine to five” job, part-time or self-employed. For these scenarios, you will need to have been at your job for the past two years and your income will usually be averaged. If you are self-employed, expect to fork over your tax returns, as “stated income loans” are a thing of the past. If you have a lot of different tax write-offs to lower what you pay Uncle Sam, you may not be able to prove enough income to qualify.
Lenders also verify that the funds you will use for your down payment are in a liquid account, like a checking account or savings account. If you like to keep your cash in a pile under your mattress, you may have trouble getting approved for a loan and will need to deposit that cash into a bank account. Lenders need to see where all the funds being used in the transaction are coming from and there is no way to document loose cash.
Hopefully, this breakdown will help you figure out where you stand and whether now is a good time to apply for a new home loan.
How to qualify for a home https://youtu.be/lFptVT-AARw
Key’s Tips and Tricks
- Know your credit. The better your credit, the higher your chances of securing the best rate and terms.
- Don’t change jobs. When qualifying for a loan, lenders look at your last two years of employment as well as your income. It’s best to avoid switching jobs or gaps in employment.
- Continue to save. Experts suggest the number one reason potential home-buyers fail to qualify for a new home loan is because they lack assets and savings.
Shynna Key- The Financial Fanatic
Financial & Business Contributor
Empowering You to Build Your Empire!