Qualifying For Loan

Make your house buying experience smooth and easy by finding out upfront how much of a house you can afford, or you are comfortable with. A little advance planning will save you time and money later, by preventing you from bidding on unattainable houses or applying for loans that are out of your ballpark.

 

How Much House Can You Afford?

Lenders have developed a ballpark formula for home mortage - you can afford a house worth about three times your total (gross) annual income. Don't rely solely on this formula, however -- it's much safer to look at your own budget, and figure out how much you have to spare and what the monthly payments on your new house will be (not just the mortgage -- factor in taxes, insurance, maintenance, and more).

According to institutional lenders, you should make all your monthly payments -- toward your house as well as other debt obligations -- using no more than 28% to 44% of your monthly income. In other words, if your monthly income is $2,000, the lender would want you to pay no more than $880 (.44 x $2,000) toward all your debts.

 

Loan Qualification – Understand Basic Facts

Down Payment

Traditionally, lenders like a down payment that is 20 percent of the value of the home. However, there are many types of mortgages that require less. Beware, though: If you are putting less down, your lender will scrutinize you even more. Why? Because the less you have invested in the home, the less you have to lose by just walking away from the loan. If you cannot put 20 percent down, your lender will require private mortgage insurance . It is to protect against potential losses. (However, if you can only afford, for example, 5 percent down, but have good credit, you can still get a loan, and even avoid paying PMI. Ask your lender about an 80/15/5 loan — an 80 percent first mortgage, followed by a 15 percent second mortgage, and 5 percent down. This gives the lender more security, while saving you the cost of insurance.)

 

Debt Ratios

There are two debt-to-income ratios that you need to consider.

Housing Ratio or Front-end Ratio - this is your anticipated monthly house payment plus other costs of homeownership (e.g., condo fees, etc.). Divide that amount by your gross monthly income. That gives you one part of what you need. As a rule of thumb, this ratio shouldn’t more than 28%.

Debt Ratio, or Back-end Ratio - take all your monthly installment or revolving debt (e.g., credit cards, student loans, alimony, child support) in addition to your housing expenses. Divide that by your gross income as well. Try to keep this ratio not more than 36%.

A high income borrower might be able to have ratios closer to 40 percent and 50 percent.

 

Credit Report

A lender will run a credit report. And from there you get a credit score. Your lender will probably look at three credit scoring models (one for home equity loans or lines of credit) and then average them to arrive at your score.

Higher your credit score, higher the lenders will rate you for ability to pay off the loan.

What's a good score? Well, FICO (acronym for Fair Isaac Corporation, the company that invented the model) is usually the standard; scores range from 350-850. FICO's median score is 723 and 680 and over is generally the minimum score for getting "A" credit loans.

Different lenders have their own way of treating the scores, but in general the higher the score, the better interest rate you'll be offered.

It is extremely easy to find out how much you would qualify using an Automated Underwriting System (AUS).

Call us today, if you need help with this.