Qualifying for a Loan
There are so many loan programs and options that it can be overwhelming for the first time buyer. We at Westonhill Financial want to demystify the experience and educate you in the process. Contact us and lets discuss your particular situation, because everyone is different.
What lenders review in qualifying & approving your home loan.
- Credit History - lenders scrutinize your credit history; number of open accounts, balances on the accounts, payment record, slow pays, collections, judgments, tax liens, bankruptcies, previous foreclosures, defaults on student loans, even the number of credit inquiries.
- Employment History - as a general rule, you should be at your job 2 years. If you have changed jobs, you should be in the same industry/field. It's okay if you recently graduated from school and are working in your field of study. Lenders are evaluating your stability. For the self-employed, the lender will require at least 2 years of self-employment, and they will average your income for the most recent 2 years to obtain a monthly income.
- Income - lenders use your gross monthly income to evaluate your debt ratios. The debt ratios are used to determine the maximum allowable monthly mortgage payment. There are two ratios: The front ratio is figured by dividing the total monthly mortgage payment by your gross income. This ratio should be no higher than 28-30%.
- Savings, Down Payment, and Reserves - lenders will require a paper trail of your money. "Mattress Money", cash, and money that just shows up in your account is not acceptable to lenders. They require a 3 month average for all accounts, and a complete paper trail for money borrowed from retirement or 401k for your down payment. They will not allow you to borrow your down payment from parents, etc. it would have to be documented as a "gift."
- Appraisal - lenders require a written evaluation of the property's value. The lender's maximum loan is based on the purchase price or appraisal, whichever is LOWER.
- Pest/Termite Report and Clearance - most lenders will require a pest report and clearance before funding the loan, especially on older homes. Your real estate agent will handle this for you.
- Purchase Contract - the lender will require a completely executed purchase contract, signed by all parties.
- Escrow - the lenders will require escrow to meet lender instructions regarding the handling of loan documents, recording, and dispersing of money.
- Title Insurance - lenders will require the security instrument (trust deed) be recorded at close, and title insurance issued insuring the lender's interest in your property.
- Hazard Insurance - the lender will require escrow to pay your premium and provide proof that your property has the proper hazard insurance, listing the lender as a mortgagee to protect their interest.
The big indicator now used is your credit score (also referred to as your FICO score), the credit agencies use a statistical model to evaluate you as a credit candidate and the odds of your defaulting on a loan. If you have had past credit issues, disclose this upfront so your mortgage broker can help you.
The back end ratio is figured by dividing the total monthly mortgage + your monthly consumer debts (car payments, student loans, personal loans, 401k loans, credit cards) by your gross monthly income. This ratio should be no higher than 36-40%.
It is important to address this issue before beginning the home buying process! The lender will also require a minimum 2-3 months reserves (money available to cover your expenses in the event of loss of job, etc.). Lenders will count your retirement, IRA's, and 401k's as reserves.
Additional Tips & Thoughts:
Is your estimated monthly payment higher than you planned? Here are other options to consider to help you pay your monthly mortgage:
Consider a "temporary buy down," which can allow you to qualify for a substantially higher mortgage amount because it reduces payments during the early years of the loan.
Restructure your consumer credit by paying it off with savings or a gift. Or reduce your monthly payments through a debt consolidation equity loan or refinancing.
A gift from a family member is allowed to assist you with the down payment and closing costs. The general rule is that the buyer must have 5% of their own documented funds for down payment and closing costs. Of course, there are 3% down loan programs and even zero down for buyers who have excellent credit, good job history, and no down payment.
Consider a co-buyer, a partner looking for a real estate investment. A parent or close relative who won't live at your house. Please note that a larger down payment may be required, depending on the loan type.
We can help you determine which qualification strategies will work best for you.
TIP: Set Money Aside for the Rainy Day!! -Don't spend all of your money on the down payment and closing costs. "Incidentals" can add up quickly and you'll want to have some cash for moving expenses, new window treatments, landscaping-and of course everything from caulk and painting supplies to lawn mowers and ladders.
In fact, your lender will require that you show evidence of having at least two months reserves of house payments after closing.
Contact us to begin discussing what you qualify for in a loan!