If you wish to buy a house, you need to get your mortgage loan approved first. Unless you happen to be one of those social media ‘influencers’ who occasionally show off their currency straps in their videos, while the average Joes experience financial insecurity. This statement doesn’t come off as an exaggeration; rather it serves as a truism of the age.
Getting the home loan approved can be a complicated process; for first-time buyers this affair often turns out to be an exhaustive undertaking, diminishing their morale. To prevent such occurrences, buyers need to brush up their knowledge regarding lending requirements before commencing with the mortgage finalization.
To facilitate this measure, you can always use a home loan calculator to view a summary of your mortgage loans and interest rates payable over the years.
When it comes to housing loans, knowing what type of loan works best for you and how a down payment impacts your monthly mortgage instalments can help you narrow down your prospects. Moreover, a good credit score can help you qualify for the mortgage.
For all the future home-owners, the following sections will help you understand the basic requirements prior ahead of the mortgage finalization.
1. Keep a wary eye on the local mortgage situation
Most financial institutions providing housing loans have introduced stricter mortgage policies to compensate for the loss, the banking industry faced during the global housing crises. New regulations are being launched every other day in a bid to verify every aspect of the applicant’s financial history. Not to mention that the Federal Reserve is slowly increasing its interest rates and more people, who are interested in buying a house, are realizing that they need to act sooner or risk increased monthly instalments. This whole scenario has created a highly-competitive environment for mortgage contenders.
2. Do not take your credit scores for granted
Your credit score is one of the deciding factors in getting your mortgage approved. Generally, a score of 660 or more is considered prime, while a score lower than 620 is considered subprime. Having a prime credit score means that you can qualify for a mortgage with lower interest rates and vice versa.
3. Regular income is a must for availing home loan
Lenders are likely to favour a person with regular earnings to avoid the possible risk of drowned investments. Individuals with a secure source income find themselves in a comfortable position when it comes to negotiating with the lender.
On the contrary, self-employed people may face a higher chance of rejection as most of these individuals are not deemed financially stable to pay off their debts – a pressing concern for major loan providers.
To balance your chances, you should focus on availing prime credit scores and work towards saving a considerable portion of your income. One should also avoid frequent job switch or leaves of absence (or do anything that may be deemed as jittery and can throw-off the lenders) prior to filing a loan application.
4. DTI Ratio: the lender’s tool for risk calculation
Too much outstanding debts can break your deal with the lender. Many lenders use the debt-to-income (DTI) Ratio to compare an individual’s monthly debt payment to his or her monthly gross income.
The DTI Ratio aids the lenders in their calculation of the risks involved in the transaction. In most cases, lenders prefer to see a debt-to-income ratio less than 36% (which represents the amount of income utilised for housing expenses and recurring bill payments). The 28% represents your pre-tax gross income allowed for monthly housing expenses (homeowners insurance and principle interest payments).
5. Consider various down payment options
Lenders will try to secure the maximum down payment he can get out of your pocket. On one hand it means you start off with more equity in your home (loan to value ratio), but on the other hand you will have to pay that sum. Conventional loans require borrowers to pay 5-20 percent of the total house cost as down payment. The government-sanctioned loan schemes require much lesser down payments.
However, you must also take into account the mortgage insurance. If you put down less than 20% down payment, chances are you will be charged insurance, or you can use 80-10-10 solution to avoid paying mortgage insurance which requires 10% down payment; instead taking out a mortgage of 80% of the purchase price and taking out a second mortgage on the remaining 10%.
6. Bulk up your liquid reserves
This is the amount of money left after you have made the down payment and closing costs. It can be in any form like bank accounts, bonds, stocks or 401Ks. When being considered for a mortgage, having a handsome amount in liquid reserves can make your chances look good as it reduces the risk.
Before you decide to commence with the mortgage finalization…
Remember that acquiring a home loan is a step-by-step process. After reviewing the types of suitable loans and their requirements, you should seek preapproval from the lender. This means that the lender has reviewed your financial and personal profiles, and is in a position to grant his/her approval for the loan if you put a contract on a house within specified price range. These preapprovals are good for 60-90 days if nothing about your financial situation changes. You will also have to pay a one-time closing cost to lenders for administration expense and it will be about 3-4 % of your home’s total sale price. The law requires the lender to give you a good faith estimate of this cost’s details in writing.