Qualifying for a
Home Loan – Steps for being approved on a Mortgage Loan
June 30th, 2006
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If you are
anticipating purchasing your first home, you will want to make sure that
you can qualify for a home loan before you even begin to look at real
estate. Most of the time, a real estate agent will get you
pre-qualified through a mortgage broker, however, this is loosely based
and you should still be aware that it does not guarantee that you will
get a loan or the type of loan that you desire.
By knowing what
your finances should look like you will be in charge of deciding the
type of loan, be it a fixed rate or interest only loan you make the
final decision. If you are not prepared with knowing how to qualify for
a home loan, you will be left very little options and you may be left
with only a very undesirable adjustable rate loan with closing points
for the loan. You can end up being put in a position that will cost you
considerably more to repay the loan.
Your credit score
counts toward your approval for a mortgage loan, but is only considered
as part of the whole equation. The better your credit score, the better
the rates of the loan, and the terms of the loan. A credit report is a
snapshot in time. Just because your credit rating is low today, does
not mean that it can’t be improved upon at another day. If you work on
improving your credit score, you will open up your options for mortgage
loans that will be available to you. You also will get the best
interest rates. You can
improve your credit score in a systematic way.
The more money
that you have saved for a down payment can also help you to get a good
loan. If you are self-employed you will need a larger down payment
typically, as lenders will scrutinize you for not having a pay stub and
a regular job. A large down payment also says to the lender that you
are in control of your finances and that you intend to invest in this
property as well. If you put down enough money you can get out of
paying for mortgage insurance that can add around $100 a month to your
payments.
If you have a
regular pay check you need to be able to show that you make enough money
to cover the monthly mortgage payments. You should have stability in
your employment. Usually working for the same company for a two year
period shows that you offer stability in your income.
If you have any
credit card debt this can reduce the amount that you can afford to pay
on a mortgage loan. The loan agent will count this credit card debt
against how much you can afford. If at all possible you need to pay of
your debt with the credit card companies.
You need to know
your debt to income ratio. You can calculate this with your monthly
expenses. There are many free debt to income ratio calculators on the
internet that will score your financial situation. A score of 36% or
less is a healthy debt load and you will have a good chance for being
approved for a mortgage loan. If your ratio is 37%-42% it is considered
ok, but you should try to improve either your income or your debt. If
you score 43%-49% you are not in good financial shape and you need to
correct the problems at hand. If you are 50% or more you need to get
help to reduce your debt and increase your income.
By knowing your
debt to income ratio you can figure how much of a home that you might
qualify to own. Instead of being “pre-approved” by a mortgage broker
for an amount that may be stretching you into an interest only
adjustable rate loan, you will know how much of a house you can really
buy. You also won’t have surprises along the way. If you are
conservative and knowledgeable about your finances before you even apply
for a loan, you not be in financial ruins years after you move into your
first home.
While loan
brokers, may be helpful, you also need to be careful believing that you
are pre-approved for the specified dollar amount. Don’t feel like you
have to go with a loan broker, if you have your credit and finances in
line, you should be able to get good loan rates directly from a bank
without having approval problems. You can check directly with banks as
well as with brokers to see who offers the best loan package.
The more you can
show your financial stability and that you handle your finances well,
the more you will be able to qualify for a home loan. Find out how much
you afford to pay in monthly payments. If you have credit card debt you
should try to pay them off if at all possible. You should try to save
up a good sized down payment if possible. If you work at improving your
credit score you can also improve your chances of getting approved.
Nicole Wilson
Best Syndication
Books
on How to Improve your Credit Score
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