How Do You Qualify To Buy A House? This weeks question from a past client that is looking to sell and move up in price …
Your credit is one of the most important things that will be considered when determining if you qualify for a home loan. It’s also one of the things that most people don’t know a lot about. Your credit history is how a lender will judge the likelihood that you’ll pay them back the money they lend you. To do this, a lender will look at the length of your credit history, how reliably you’ve paid on your loan accounts and if you’re maxed out on credit cards or loans. These are also the factors that determine your credit rating or credit score. Your credit score will be used to qualify you for a mortgage and will often determine the interest rate you will be offered.
Credit scores used for a mortgage range between 350 (low) and 850 (high). A healthy credit score is generally considered to be above 740 and a poor credit score is anything below 600. The higher your credit score, the better the interest rate you’ll likely be offered. For most lenders, the minimum score to qualify for a home loan is 620.
The minimum required down payment when buying a primary home is typically 3.5 percent of the sales price, which will allow you to get an FHA loan – a great option for first-time home buyers or anyone who can’t come up with a huge down payment. FHA loans also don’t penalize you with a higher interest rate if you have less-than-perfect credit. Another option is a conventional mortgage. Conventional loans typically require 5 percent to 10 percent down depending on the lender.
When buying a home, keep in mind that you will not only need to have funds for the down payment, but you will also need additional cash for various settlement fees. These can range quite a bit depending on the type of the loan and the area where you are buying; talk to a trusted lender to learn more. The good news is that home loan programs allow you get a credit from the home seller to help pay for these settlement fees, as well as additional costs, like your first year’s taxes and insurance.
Another factor looked at by lenders is your debt-to-income ratio (DTI). This is simply your fixed expenses with the new mortgage compared to your gross monthly income (income before taxes are taken out). Lenders typically want to see someone spending less than 50 percent of their gross monthly income on these fixed expenses, which include your mortgage payment, property taxes, association dues, home owners insurance, car loans, student loans, credit cards and any other fixed payments that would show up on your credit report. Variable expenses like utilities, phone and cable are not included in your DTI. Lenders also want to see a good employment history and will verify your past two years of work.
Lenders also verify that the funds you will use for your down payment are in a liquid account, like a checking account or savings account. If you like to keep your cash in a pile under your mattress, you may have trouble getting approved for a loan and will need to deposit that cash into a bank account. Lenders need to see where all the funds being used in the transaction are coming from and there is no way to document loose cash.
references: eric ehrhardt, quizzle.com
Donald Horne, Team Success Listing
Associate Broker for Coldwell Banker Shooltz Realty
“best of the best in 2014”
Oxford Office 248-969-8065
Lapeer Office 810-338-0628