If you are considering purchasing a home for the first time, or simply want to know what it would take to get you there someday, there are standard guidelines that home loan qualification requires. Keep in mind that each lender will weigh your qualifications differently and that even though you might feel attaining a loan is impossible it might not be. Take a look at some of the areas that home loan lenders will look at.
Debt-to-Income Ratio – A serious question that lenders have to consider is how much debt you have versus the amount of income you are generating. This is called your debt-to-income ratio. They will take into account all of your fixed expenses and measure that number against how much income you generate in a month.
Less than 50% of your income should be going to your expenses for most lenders. Keep in mind that utilities, cable television and phone bills are among the few that are not included in a debt-to-income ratio.
Assets – Depending on the home loan lender, most like to see that you have a sufficient amount of cash reserves for a regular mortgage payment. They also like to see that your down payment comes from a checking or savings account which means that cash is not loose. For this reason it is highly recommended to use a bank account for housing money several months prior to actually purchasing your home.
Down Payment – A down payment is required to attain any type of home loan, although depending on the loan and the home that you are purchasing this amount may vary. If you are going to be attaining an FHA loan, one that is great for first time buyers, the minimum down payment is 3.5% of the sale price of the home. For a traditional home loan this amount usually increases between 5-10% of the sale price of a home.
Don’t forget that on top of the down payment you will need to have more money to pay for closing fees and other charges that accrue with a settlement.
Credit History – Your credit score and history are of extreme importance to mortgage lenders. Not only can they determine the likelihood that you will pay them back based on your debt payment history, but they will take your credit score as an indication of responsibility.
Mortgage companies typically consider a great score to be above 740. For the most part, most lenders require a minimum score of at least 620 for a home loan.
Your credit history also tells the lender about your rental history and whether or not you have ever been late on your rent in recent years, which can certainly raise a red flag.
For most first time homebuyers, it can be helpful to make sure that your finances are in order a few years prior to purchasing. This will not only ensure that your credit is clean, but that you have a solid down payment saved up to purchase your ideal first home.