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Qualifying for a Home Loan – Steps for being approved on a Mortgage Loan

June 30th, 2006

Qualifying for a Home Loan – Steps for being approved on a Mortgage Loan

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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.

 
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Nicole Wilson
Best Syndication

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