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How to qualify for your first Home Loan

February 2nd, 2006

How to qualify for your first Home Loan


There are a few things that you need to have accomplished before searching for you new home.  Usually a real estate agent wants to have a letter of pre-qualification for a home loan to start shopping for a home.  In order to qualify for a home loan you need to meet certain requirements.

Before you apply for any home loan you should get a copy of your credit report from the credit reporting agencies.  You can either sign up for a yearly monitoring service that will send you a report once a year with quarterly updates for credit changes, or you can contact each of the agencies directly for a copy of the report.  Try to get your credit report cleaned up and improve your credit score.  If there are any errors contact the reporting agency to get the information corrected.


You need to save for a down payment for a home and be ready to show that you have the money to do this before applying for the loan.  You should visit the FHA website for the calculator that is available to figure out how much of a home you can afford.  This is a great place to start when planning to buy your first home.  After you have calculated the amounts you will know how much income is needed along with the down payment.  Generally speaking you should have about one-third of your income available for a mortgage payment.  Anything over this would make it hard to qualify for a loan and would be the negotiable factor of the loan, based on down payment amounts, and credit score, as well as the type of loan.

If you have car payments, a student loan, child support payments, or monthly credit card payments, they count against your income.  It is part of the equation in calculating how much income you have available to spend on a mortgage.  The calculators are good about figuring in these expenses.  It is your job to add them all up. 


Donít forget that other hidden costs that are involved with owning a home.   Mortgage insurance if your down payment is low it is required as well as home owners insurance.  There is also property taxes which are different for each state.  Most often seen with condos are home ownerís association fees which vary greatly depending on the location.  Also newer home tracks can also have home ownerís association fees attached to them as well.  If the home you want to buy is in a flood plain or earthquake area your lender may require this extra insurance as well.  Fire prone and mud slide areas also have higher insurance rates too.  The more down payments you have, the less the lender can require and you can save money in not having to buy mortgage insurance.

Chances are a fixed rate loan is the best type of a loan to get, because your payments will not fluctuate when interest rates change, and you wonít have a balloon payment that could put you in a crunch in the future.  If you are a first time buyer you should try for the government sponsored loan programs.  Countrywide loans are one of the biggest home loan lenders.  The lender that you work with should be able to offer a FHA or VA type of a loan especially if you are employed and a first time home buyer.  There are maximum dollar amounts that these loan programs which can make it hard to cover the cost of the house in expensive housing markets.  In this case you would either want to save more money to cover the difference in price or try to find a house or condo that is within the loan amount.


Your income needs to be adequate enough to show that you are making a good living. If you are employed you may only need a few months worth of pay check stubs showing your income, along with a credit check, and bank statements.  The government has FHA and VA loans that make the down payment considerably lower as well as let you finance a larger loan amount than a traditional fixed rate loan would do.  So if you are employed and have good income and credit ratings the first place to shop for a loan is for an FHA or VA loan.  Fannie Mae and Ginnie Mae are government backed programs that offer assistance and programs for lenders to loan to persons that have low to moderate income.  The government programs do not lend the money themselves but help make it possible for lenders to loan to lower to middle income individuals.

If you own your business and are self-employed you can expect to be put under a microscope for fine inspection.  You probably will not get the perks of a first time buyer and will most likely need a larger down payment to get your first home loan.  You will need to provide income tax records going back for a 2 year period if you want a good fixed rate loan.  If you donít have great income tax records, but you have good credit and a large down payment you can go with a stated income home loan.  The benefit is that you can get a loan despite a bad tax year.   The bad part of a stated loan is that they are usually adjustable interest rate and you have to put a large sum ranging from 10 - 20 percent for a down payment. 

The loan broker is a person that shops for the best loan for you.  This can be a good and a bad thing.  This is usually better for people that do not have good credit and are self employed.  If you have all the elements for qualifying for a FHA or VA loan you should not go to a loan broker.  If you find that you are not in the running for the low down payment loans then you should check in with a loan broker to help you find a loan.

With the internet, many loan brokers are now online and make it a quicker process to shop a loan for you.  You should be careful to give your information on the internet and check to make sure that the company is legitimate.  E-Loan for instance is a company that has been around and will not take your information and use it for fraudulent activities.  Make sure that the loan broker shows you all your options available and donít fall victim to financing more than you can afford.  Many times a broker will get you a pre-approval that is for an ARM loan.  The bigger the loan amount the more commission they get.  The day you go to finance the fixed rate loan on the higher amount you wonít be able to, you will get stuck with the ARM loan.  So know what you are truly able to afford for a fixed rate loan.

The reality may be that the only way that you can afford a loan is by going with an ARM (adjustable rate mortgage) or one that has a balloon payment.  This is a riskier investment in the long run as there will be a good chance that you will end up selling your house sooner.  Refinancing also is something to consider in the future and you should make sure that the loan you choose lets has no penalties for paying off early.

Planning in advance the down payment, your credit rating and your income is the first steps in home ownership.  If you get the savings for the down payment you are more than likely on your way to home ownership.  Owning a home is advantageous not only for the extra tax deductions on the interest paid on a mortgage, it also usually increases in value and you earn equity in the home.  Being knowledgeable about the home loan process is extremely helpful because it removes much of the anxiety in the buying process.

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By Nicole Wilson
Best Syndication Staff Writer

Real Estate

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