Are you interested in buying a home? For many Americans owning a home is the achievement of the American Dream. It is an indication of stability and provides you with many benefits. To begin with, a home makes your costs more stable and predictable. They are ideally based on a fixed interest rate mortgage.
Also, the property tax and interest portion of the mortgage payment is treated as a tax deduction. Moreover, it gives you more privacy and provides a future nest egg. This is because homes generally increase in value and build equity. To cap it, there is the pride of home ownership and the close links to your community.
However, many people find the process of buying a home intimidating. To begin with understanding the Mortgage requirements is a challenge to many.
How to qualify for an online Home Loan
Two recent major developments in the mortgage marketplace may help millions of American qualify for a home direct loan.
First, the 3 main credit rating agencies in the United States, Experian, TransUnion, and Equifax, will drop civil judgments and tax liens from some consumers’ profiles. These are profiles in which the information is incomplete. This move will allow millions of American to qualify for home loans.
Second, mortgage giants Freddie Mac and Fannie Mae are allowing loan seekers to qualify for nation 21 loans with higher levels of online debt. In fact, the 2 firms have increased their debt to income ratio limit to 50% of pre-tax income from 45%. This move is made to help people with higher levels of student loans.
Here is how to qualify for a mortgage;
According to mortgage experts, most of the frustration around getting a home loan can be avoided through due diligence. By doing your homework, you will avoid most of the mistakes committed by first time buyers. So be prepared:
- Do you need a down payment?
It’s always a good idea to have a down payment. This is because the loan to value ratio (LTV) is one of the loan requirements that determine your eligibility. So, the LTV ratio is the ratio of the amount you want to borrow to the value of the property i.e. how much the property is worth. The more favorable the ratio, the more qualified you become.
In the best case scenario, you should have a 20% down payment. This means you have a maximum 80% Loan to Value ratio. Keeping your LTV at or below 80% is better because lower LTV’s can help you to get better interest rates. If you cannot afford to save enough to make a 20% down payment and keep your LTV below 80%; you may require buying private mortgage insurance.
- How much down payment
The ideal down payment to bring to the table is 20%. However, even a 15% or 10% down payment will put you in a much better situation at closing. This is because, the higher the down payment you have at closing time, the more ownership you will have. This also means, the less you will pay in financing during the loan term.
- What type of property can you afford?
Decide on the type of home you can afford. It’s a good idea to do this before you start assessing properties. The home you can afford will be determined by your income, your down payment and your level of debt. In fact, you can use online resources to help you work out your price range. They can also help you get pre-qualified from a number of top rated mortgage lenders.
As you start shopping for a loan, you come across various lenders who use these terms: pre-qualification and pre-approval. What is the difference between the two? Pre-qualification allows you to evaluate loan details without the lender assessing your credit. Also, it doesn’t need your social security number.
Pre-approval is where the lender runs your credit and assesses your finances. It requires your social security number. It also involves a taking hard look at your credit report. However, it’s the best way to shop for a home loan.
- Debt to income ratio requirements
Most mortgage lenders require the debt to income ratio be within 36%. That is, your total monthly debt including student loans, credit card bills, and car loans must not exceed 36% of your total monthly income. If your ratio is too high, think of paying off the high interest credit cards. This will help reduce your level of debt and lower the debt to income ratio.
- Credit score requirement
Your credit score is one of the major requirements that determine your eligibility for a home loan. A credit score over 720 will qualify you for the most favorable loan rates. A credit score below 720 can still be approved but will earn you higher mortgage rates.
Less than 20% down payment and lower credit scores will negatively impact your application. This means you may have to consider lenders that deal with borrowers in the subprime category. Loans in this category attract much higher fees and interest rates. This is because there is a much higher risk of foreclosure.
- Your employment history requirement
Your employment history is an important requirement in determining your ability to repay the home loan. People in stable employment, who have been working at the same firm for more than 2 years, receive more favorable consideration. Lenders tend to be wary of borrowers who have a history of job hopping or company hopping. If you work for a commission or are self-employed the lender may ask for your bank statements to evaluate your past income history.
The bottom line
For many Americans owning a home is the achievement of the American Dream. It is an indication of stability and provides you with many benefits. Unfortunately, many people find the process of buying a home intimidating. However, most of the frustration around getting a home loan can be avoided through due diligence. By doing your homework, you will avoid most of the mistakes committed by first time buyers. Also, being prepared will also save you thousands of dollars from unnecessary fees and interest.