DO I QUALIFY FOR A HOME LOAN?
When qualifying for a home loan, a lender will review several varying components of your financial stability. The information provided on your loan application will determine if you're mortgage-worthy. Here are the main important factors when being considered for a mortgage.
You need full documentation of your income — and plenty of it. Some mortgage lenders require one month’s of pay stubs and two months’ worth of bank statements on top of your last two years’ tax returns. Making sure that you can handle the payments is paramount to mortgage lenders right now. If you are self-employed, this process can be even more onerous because any and all business/corporation tax returns along with YTD P&L and Balance sheet statements are also required. Over and above all of this, a 4506T will also be verified against the IRS records.
The amount of debt you have in relation to your income is a major consideration for mortgage lenders. They want to make sure that your debt won’t overcome your ability to pay. For most lenders, the debt-to-income ratio tops out at around 45% of your monthly income being used for debt payments. However, if you want the best mortgage rate, you will need to adhere to the 28/36 qualifying ratio.
· Credit History
As you might imagine, mortgage lenders are not so rash anymore. In order to even be considered, you will likely need a credit score of 620-660. Typically, three trade-line accounts with a 12 month history is required. If you’ve recently had a previous bankruptcy, foreclosure, short sale and/or loan modification – Click Here to view updated timeline guidelines for this type of history. If you want the best interest rate, though, you will need somewhere around a 720-740. Those low mortgage interest rates are nice, but not everyone will qualify for them.
Another important factor lenders look at is your employment history. They want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a steady job can improve the likelihood of getting approved. A continued 2 year history of employment with the same job or same industry is now required.
· Property or collateral
To protect the lender's investment if you can't repay your loan, the home you buy must be worth enough to back up your loan. Make sure the home you are seeking can and will appraise for the sales price you are offering. Another precaution to take would be to make sure the area or subdivision is not in a declining market status.
· Financial resources used for closing costs
Many lenders want a 5% to 10% down payment, although some will accept 0% down. For the best rates, some lenders are now requiring 20% down payments. As a result of these new down payment requirements, many people are turning to FHA loans which only require a 3.5% down payment. USDA is still offering 0% down payment programs. Depending on the loan program you select, you will have to provide proof of funds you are prepared to use for your down payment in the form of documentation and/or a gift.