After reading recent news articles, many prospective homebuyers are surprised how easy it is to qualify for home financing today. It’s the job of a loan officer to help you review your scenario, determine which types of financing fit the best, and then help you focus on the financing program with the lowest interest rate, closing costs, etc. If purchasing a home makes sense to you, your financing will likely be approved.
The specific guidelines for Conventional, FHA and VA mortgages vary somewhat, but mortgage qualifying criteria can be divided into five primary categories:
1. Income
Salaried and hourly employees I talk to today are often surprised to find out that they can typically qualify for a mortgage the very first day they start a new job. Self-employed borrowers sometimes need a two-year self-employment history, but exceptions are often made with only a one-year self-employment history. Your source of income should be likely to continue for at least three years.
2. Credit history
Good credit is best, but perfect credit is not required. Many people are surprised that it’s often possible to finance a home and still get a low interest rate only two years after the discharge of a bankruptcy. Credit requirements vary depending on many factors including the type of financing program such as Conventional, FHA or VA. It’s a Loan Officer’s job to match your background to the financing program that fits you the best.
If you have had credit problems, you can’t change the past, but there are always ways to improve your credit. Some credit repairs can be accomplished quickly; others require a little more time and effort, but the rewards are extensive. I had one homebuyer who raised his credit score by more than 50 points, by just paying down approximately $350.00 on credit cards. If you have any concerns at all about credit issues, be sure to seek competent advice.
3. Down payment and closing costs
There are still financing programs available that allow homebuyers to purchase a home with little or no down payment. A gift is also acceptable for many mortgage programs. Sellers are often willing to pay your closing costs. I rarely see first time homebuyers save enough money to make a significant down payment on their first home.
4. Debt ratios
Most people feel that they can afford a monthly housing payment (PITI & association fee if applicable) up to about 33% of their monthly income before taxes are taken out. That works out to a mortgage amount of approximately 3.5 times your gross annual income. The mortgage amount could be a little higher for a single family home and would need to be a little lower for a condominium or townhouse because of the association fee.
When you add on other debts such as car and credit card payments, most people are comfortable as long as their payments don’t exceed 45% of their monthly income before taxes are take out. As of today, there are still mortgage programs that allow higher debt ratios if they make sense.
5. Property value and characteristics
When it comes to a reliable estimate of a home’s value, if I were buying a home today a knowledgeable and trusted Realtor would be my number one source of information. As a final check for mortgage purposes, a licensed appraiser must complete a written appraisal of the property that supports the price you have agreed to pay. Property characteristics such as single-family, duplex, townhouse or condominium features may trigger other mortgage underwriting considerations. Single-family homes have the fewest requirements. Townhomes and condominiums have associations that must also be considered.
Summary
Mortgage approval requirements are not always logical or intuitive. The best way to determine if you are qualified to finance a home is to contact me. It typically only takes a few minutes on the phone to determine if your plan is realistic, then you can make an informed decision on what to do next.
Lou Auger, Summit Mortgage – Email – Website
