Getting a Home Loan
Unless you are able to pay cash for the home you are buying you will need to get a home loan. The process of getting a home loan can be tedious and difficult for some, yet easy for others. Here are the basics you need to know to demystify the process.
Lenders like to get paid on the loans they make. They want the amount they lend you back with interests and they are sticklers about it. They use three main criteria to determine if someone is creditworthy or not: Credit, Income, and Assets. Where you stand on each one of these categories determines whether or not you will qualify for a loan, what kind of loan, as well as the terms and cost of that loan.
Let’s explore these 3 criteria below.
Lenders want to see how you have handled your previous financial commitments by running a credit report of the three bureaus: Experian, TransUnion, and Equifax. Based on how long you have had your credit accounts and whether or not you’ve paid satisfactorily on them, you have 3 FICO scores ranging from 300 to 850. Lenders will take the highest and lowest of these, put them aside, and will go with your middle FICO score. Your FICO score will have a great impact on the interest rate and cost of the loan. The higher the number, the better off you will be.
It pays off to keep your credit in good standing!
In order to qualify for a conventional loan, the minimum FICO score required is 620, although, some lenders will consider a FICO of 600. Whereas a minimum FICO of 580 is required for an FHA loan.
There are lenders who will extend a loan with FICO scores lower than these. Keep in mind though that they do it at a premium.
The interest rate and initial loan costs are considerably higher than if the scores fall within the minimum requirements.
Before a lender grants you a loan they will examine your income and how stable that income is.
2 years of working in the same field are considered stable. If you are a wage earner being paid a salary or an hourly rate it is relatively easy to establish this amount. If you are self-employed it’s a bit more complicated.
Once your gross pre-tax income has been determined then any additional debt you already have will be taken into account in order to establish the maximum mortgage you will qualify for by arriving at what your housing ratios will be.
Housing ratios are determined by basically dividing your gross income by the total of the future mortgage payments plus any additional debt and any other financial obligation you may have.
Assets in this sense are your down payment and any liquid assets you may have for reserves. Lenders don’t like seeing all of your funds going towards the purchase of your home. They would like you to have some money put aside for reserves in case of an unforeseen event.
If you have a retirement account such as a 401k or Simplified Employee Pension plan (SEP) it may be considered as reserves.
Let Us Help You
We are happy to provide this information to you on our website. We have found, however, that many people prefer to have a phone conversation with one of our experienced loan agents, followed by a face to face consultation.
At our initial consultation, some clients have found that they are not able to qualify for a home loan at that moment. We have assisted many of them in establishing a course of action to remedy what is keeping them from qualifying. Accordingly, many have been able to qualify for a home loan after a few months after following the required steps.
Give us a call today to discuss how we may assist you in getting your home loan.