Depending on your personal preferences, there are not many things greater than owning your own home. With home ownership, you have the freedom to change and upgrade things at your will. Not to mention that it’s a good investment for your future.
But what does it take to own a home? You may think that if you can simply afford your rental payment each month that owning a home may not be that much different. But a mortgage is far more extensive than a lease.
If you’re tired of renting and wondering how to qualify for a mortgage, then you’ve come to the right place. In this article, we’re discussing everything you need to know before you attempt to search for a home to buy. Keep reading to learn more.
How to Qualify For a Mortgage
Qualifying for a mortgage doesn’t take much time if you already have your arrangements in order. But, what arrangements should you have in order and in what order?
Here’s a breakdown of what you should be paying close attention to in your life and lifestyle while in search of a home loan.
Lenders will review your employment history to ensure that you have a steady job history. Borrowers that have a history of job hopping without achieving longevity may find it more difficult to obtain a loan. Lenders are looking for people with two or more years on a job and those people will receive more favorable considerations in the loan decision-making process.
Self-employed individuals or those that work on a commission pay basis may be required to provide bank statements dating back at least two years to show proof of income history.
Of course, one of the most important things that you’ll need to do before you can qualify for a home loan is to set up a budget. You’ll need to know how much house you can afford before you start shopping anyway so it’s a good idea to make sure that your finances are in order. Lenders will be scrutinizing your finances carefully so the better shape your books are in the better.
When preparing a budget, you’ll need to consider your monthly mortgage payment, a down payment for the home and other fees that may be associated with the purchase.
Your credit is another major factor in obtaining a mortgage. Managing your credit score should be a regular part of managing your finances so there should be no surprises when it comes time to shop for a home loan.
In general, lenders like to see credit scores above 720 for home loan approvals, but you can find loans with a credit score as low as 620. There are even some options, such as FHA loans, that only require a credit score of 580, although you’ll pay private mortgage insurance with a lower score.
You may hear the terms ‘pre-approval’ and/or ‘prequalification’ when it comes time to start shopping for a home loan. There is a difference between the two.
A prequalification merely allows you to compare loan details with different lenders without any lenders accessing your credit. You will not be required to provide your social security number for a prequalification.
A pre-approval does require your social security and your lender will perform a hard credit inquiry which will affect your credit score. It’s generally recommended to wait to obtain a pre-approval until you are ready to find a home that’s right for you.
Many lenders like to see at least a 20% down payment. This means that for a $100,000 home loan, you’ll need to bring $20,000 to the closing table. While the 20% is an ideal number, even 10 or 15 percent will show the lender that you’re serious about investing in the home.
The main thing to think about with a down payment is that you’re trying to finance less. This will not only make a difference in your monthly payment but also the total amount that you pay for the home over the life of the loan.
Loan to Value Ratio
You’ll want to consider the loan to value ratio in any home that you’re considering. Loan to value is often referenced in mortgage scenes as the LTV and it’s assessed during the time of underwriting on your loan.
To figure out the LTV on your loan, simply divide your loan amount by the amount of the home’s appraised value. The resulting number is your LTV. You can achieve a lower LTV with a bigger down payment or by finding a home that is appraised for more than the selling price.
Lenders are going to want to look at your debt ratios which will indicate whether or not you can actually afford the mortgage. You should be aware of both the front-end ratio and the back-end ratio.
The front end ratio includes the amount you expect to pay for your monthly mortgage costs including homeowner’s association fees or the like. Dividing this number by your gross monthly income will give you the front end debt ratio.
The back-end ratio, on the other hand, includes all of your monthly revolving debt which may amount to credit cards, student loan debt, alimony, etc. You can also divide this number by your gross monthly income to find out your back end debt ratio.
Lenders like to see no more than 28 percent for your front end ratio and 36 percent for your back-end ratio but it may also depend on your income.
Learning how to qualify for a mortgage can be a bit overwhelming at first. Just keep these tips in mind as you venture forth toward homeownership. Things will start to make more sense the further you get into the process.
The best thing you can do for how to qualify for a home loan is to keep your spending to a minimum, especially on your credit. If you don’t need it right now, don’t buy it. And, keep your credit card balances low if not entirely paid off so that lenders can see how responsible you are with your money.
Qualifying for a mortgage is just the first step in your journey. You’ll also need to know the difference between fixed rate and adjustable rate mortgages, also known as ARM loans. Not to mention that you’ll need to find an actual home.
Take your time and remember that patience is your friend. When you have it all figured out, you’ll be a homeowner!