Updated: Jan 5
If you are tired of renting and are ready to make the transition into homeownership, one of the very first things you will need to do is obtain qualification for a mortgage loan. Buying your first home is an exciting experience, but it can be overwhelming with all of the paperwork and details you have to know in order to obtain a mortgage. Here is all that you need to know about qualifying for a mortgage loan.
Lenders traditionally like to have a down payment that is 20 percent of the home’s value. There are many different kinds of mortgages that require less of a down payment. If you are putting less than 20 percent down, your lender will require private mortgage insurance to protect themselves from losses.
LTV is the loan to value ratio. The loan is divided by the home’s appraisal value and this is the LTV. If your loan is $70,000 and the home is appraised at $100,000, then your LTV is 70 percent. The 30 percent down payment makes for a lower LTV, but even if your LTV is 85 percent, you can still qualify for a loan, but at a higher interest rate.
There are two debt-to-income ratios that you need to consider when trying to get a loan. First is the housing ratio, which is the anticipated monthly house payment plus any other costs of owning a home. When you divide this amount by your gross monthly income, this is the first part you need. The second is the debt ratio, where you take all of your monthly revolving debt in addition to housing expenses and divide it by your gross income. This results in your debt-to-income ratio. You should aim for your debt to be no more than 28 percent of your gross monthly income on the front end and then 36 percent for the back end.
The lender will run a credit report to see what your scores are from the three major credit bureaus. Lenders will use the median score of the three for qualifying purposes. The higher the score, the lower your interest rate will be. FICO is usually the standard score and the median is 723, but 680 and over is generally the minimum score for getting “A” credit loans.
Today, you can find out if you qualify for a loan quickly through an automated underwriting process. This program looks at your credit score and debt ratios. Many lenders use AUS to pre-approve a borrower. You will still need to provide some information, but the system takes the info you provide on the honor system, but you will have to provide proof that the info you provided is accurate.
As a first-time homebuyer, it can be overwhelming thinking about the mortgage obtaining process. Let me help you not only obtain a mortgage but also find the home of your dreams. Contact me today.