How to Qualify to Buy a Home – Mortgage Guidelines
The variables a lender is examining
A lender will review all your financial data to see if you qualify to buy a home. The variables a lender is examining include your income, debt, credit, and savings. One of the most important of this is your income, and determining the affordable monthly mortgage payment and debt. Lenders will also consider the length of employment, and if self-employed, a stable and established history. Self Employed buyers may need to provide tax returns to verify net income after deductions.
How credit scores affect mortgage rates
Scores range from 300 – 850. A score below 620 is considered sub-prime and indicates a higher risk to lenders resulting in higher rates and fewer choices of loans, 620 to 659 is considered near-prime, but may still be viewed as a higher risk candidate. 660-719 is Prime, and 720 or above is Super-Prime, with the best rates available. However, buyers looking to purchase their primary residence have options to qualify for an FHA loan with credit scores as low as 500 and low-interest rates.
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to one free credit report from all three major credit reporting bureaus – TransUnion, Equifax, and Experian – for every consumer every 12 months (visit annualcreditreport.com to order your free report). Make sure that your credit history is accurate and request the reports from each company and check if there are any errors. There are also many great credit monitoring subscriptions available that give you data and guidance to help you monitor and improve your credit score.
The ratio a lender uses
There are a few calculations a lender uses.
- The front-end mortgage ratio or mortgage-to-income-ratio is your total monthly housing expenses to income ratio, or the percentage arrived at dividing the anticipated mortgage payment by the gross income
- The back-end mortgage ratio or debt-to-income ratio is calculated by adding all of the borrower's monthly debt payments together and dividing that sum by the monthly income.
Mortgage debt to income is the ratio a lender uses to calculate if you qualify for a mortgage. Most lenders prefer a debt-to-income ratio lower than 36%.
How to prepare in advance to get approved?
- Since the most important factor is income, you will need a verifiable source of income.
- Get your finances in order. Pay your debt on time, which includes all your loans, leases, and credit cards. Considering paying down credit cards where you are carrying balances.
- Check your credit report for errors and monitor your credit score.
How to find the right lender or bank?
When you are like most people you probably ask someone you trust for a recommendation. But when it comes to your mortgage, you should always consider that your situation might be different from your friend’s situation. Therefore always consider that you should find a lender or a bank that fits your needs the best. Before getting started make sure that the bank, savings & loan, credit union, or mortgage broker is active in the product and local market for the type of loan you need. The Realtors of AMSI have long-standing relationships with many lenders when a referral is needed.
Contact one of our Real Estate Agents anytime to learn more about the process of buying a home.
