Everyone knows how rewarding it can be to own a home, but how many people know what it takes to qualify to buy a home?
There’s an understandable amount of confusion and misinformation about the mortgage qualification process. And sometimes, it can be nearly impossible to decipher fact from fiction.
So today, we’re going to dispel the myths about the income needed for mortgage approval. Then, we’ll lay out the steps you need to take to get yourself into the home of your dreams!
What mortgage can I qualify for?
Whether you’re a seasoned investor or a first-time buyer, the mortgage qualification process can be pretty challenging without proper guidance. One of the most important hurdles to jump is figuring out exactly what sort of mortgage you qualify for.
The old formula lenders used to figure out how much a borrower could afford was about three times the gross annual income. These days, however, that formula is less reliable.
That’s why lenders now look more carefully at the individual budget to figure out how much money there is to spare, and what the monthly mortgage payments will be.
The first step in finding out what mortgage best fits your needs is to use a mortgage pre-approval calculator.
Using the mortgage pre-approval calculator is the best way to determine your ability to qualify for a loan. While it won’t guarantee you will qualify for a new loan, it’s the perfect way to gauge your finances for buying a home.
After all is said and done, you may even find that you have the perfect income needed for mortgage approval!
Mortgage Qualification Process
There’s so much that goes into buying a home, but let me assure you: it’s totally worth it.
So, to make it a little less overwhelming, here’s everything you’ll need to know about the mortgage qualification process:
Pre-approval vs. Pre-qualification
The moment you decide you’re ready to start shopping for a new home is when you’ll encounter “pre-approval” and “pre-qualification” from lenders.
And the first thing you’ll probably ask is: What’s the difference?
Pre-qualification doesn’t require your social security number and lets you compare loan details without undergoing a credit check.
Pre-approval is when the lender runs your credit and takes a hard look at your finances. During this process, the lender will need your social security number.
I’ll go ahead and say it: if you can afford a 20 percent down payment, you’ll be way ahead on your mortgage payments and will probably get a better deal overall.
However, if you can only afford 15 or even 10 percent, you’ll still be pretty well off when closing time comes.
The more you put down at closing, the more of the home you own from the beginning. This means you’ll be paying much less in financing over the lifetime of the loan.
To figure this out on your own, divide your loan amount by the home’s appraised value. If your loan is $70,000 and your new home is appraised at $100,000, you’re looking at a 70 percent LTV.
That’s a fairly low LTV because of the 30 percent down payment, but even with a 95 percent LTV you shouldn’t have too much trouble getting a loan.
This part takes a bit more math, so have your calculator handy!
First, you’ll need to take your anticipated monthly house payment plus any other costs of ownership and divide that amount by your gross monthly income. This is called your housing ratio.
Second, take your monthly installment or revolving debt (student loan payments, credit card debts, alimony, child support) and add it to your housing expenses. Then, divide this number by your gross monthly income as well. This is your debt ratio.
Ideally, your housing ratio should be no more than 28 percent of your gross monthly income. Your debt ratio should be no more than 36 percent. Although, if you’re a high income borrower, those ratios may be closer to 40 and 50 percent – the guidelines vary widely.
Tip: If you can’t find your calculator, use this online debt-to-income calculator!
It seems like your credit report is always brought up when making major life decisions, isn’t it?
Once the mortgage qualification process really gets rolling, your lenders will run a credit report on you by looking at three different credit scoring models.
The higher your score, the more faith the lender will have that you’ll be able to pay off the loan.
If you’re like me, you’re probably always wondering: Do I have a good credit score?
Credit scores tend to range from 350 to 850. A median score is 723, and anything over 680 is the minimum for receiving an “A” from lenders.
Each lender will treat the scores differently, but the better your score, the better the interest rate you’ll be offered.
Remember, your credit reports and credit scores are subject to change. A lender might decide to take a look at your credit multiple times before the day you walk through the door of your new home, so it’s wise to stay on top of your score!
To always know where you stand, use the credit report resources authorized by federal law to request your free credit reports from the three major credit agencies to know for sure.
If you’ve successfully gotten through all of this and secured your mortgage, you’re cleared to make an offer on a house with full confidence that you’ll be able to close the deal.
And with the right real estate agent, the closing process will be over before you know it.
On that note, if you’re looking for an agent in the Killeen, Ft. Hood, or Austin area to help you finalize the purchase of your new home, contact me today! I’d be happy to bring you one step closer to owning the home of your dreams or to answer any other questions you may have about the real estate business.