Qualifying For A Home Mortgage
Qualifying for a mortgage, or getting “preapproved” for a home loan, can seem daunting. We will show you what to expect when looking to get a loan for a home and just how easy and fast it can be.
There are generally six different aspects of your financial life that a lender or bank will look at when deciding how much money they are willing to lend you to buy a home. The first is your income. Lenders want to know if you are in a stable job or will be unemployed right after they give you a bunch of money. They like to see that you have been in your current position or company for at least two years. If you have changed jobs recently, then they are looking to see if you are in the same industry and just moved companies for higher pay.
The second thing lenders are looking at is how much debt you are carrying. This includes credit card debt, school loans, car payments, etc. There is a formula called the debt-to-income (DTI) ratio which measures the amount of income you make versus what you owe. Debt-to-income ratios vary per lender, but usually they don’t want it above 40%. There are loans with higher DTIs, but you’ll probably pay a higher interest rate to get the loan because the bank feels like you are a bigger risk as a borrower.
The third thing lenders look at is your credit. Most people think their credit is worse than it actually is. Credit scores usually take 30 days to change, and they change monthly depending on how much debt you have as well as many other factors. If you pay off a large chunk of your credit card, then 30 days later you could very well see your credit rating improve. There are three credit agencies which include Experian, TransUnion, and Equifax. Your credit rating will be slightly different with each of these bureaus. Many lenders have a credit repair and enhancement department, so if you need to improve your credit score but don’t know how, contact us and we will help you find a lender to help you do that.
Employment history is another factor banks and lender look at for home loans. They want to know that you will stay employed before, during, and after your get your home.
Lenders want to know if you already have property. How many other mortgages do are you responsible for? Did you get a home loan in the past and default? What kind of property are you trying to buy now… a small condo, or a four unit apartment complex?
The last aspect that lenders consider is if you have enough cash reserves for all the extra costs of buying a home. These costs include your down payment, closing costs, prepaids, taxes, and insurance. Often times lenders will require three to nine months of cash reserves depending on when property taxes are due. To make sure that you don’t just pay your mortgage to the bank, and then neglect the property taxes (which will make the county and city take a lien out against your home), there is an escrow account setup for you to pay your loan amount, your property taxes, and your insurance costs all in one payment each month. So if property taxes were just due for the year when you buy your home, it is likely you will be required to put more cash reserves in the escrow account to cover the taxes for the next year.
In general, if you don’t carry a lot of debt, have a stable job, and pay attention to keeping your credit healthy (mainly by not carrying a lot of debt an making late payments), you will have no problem qualifying for a home loan. If you do, reach out and we can help you with a plan to become a homeowner before you know it!