Getting Preapproved For A Mortgage
You can look at general requirements to buy a house on your own, and figure out if you might qualify based on your finances.
But your mortgage lender gets the final say. So when youre ready to get serious about buying, your first step is to get preapproved for a mortgage.
Some home buyers make the mistake of shopping for a property before meeting with a lender. But with a preapproval, youll know what you can afford before starting the process.
This way, you only look at houses within your price range. Plus, a preapproval letter indicates that youre a serious buyer. In which case, a seller will give more consideration to your offer.
When getting preapproved for a mortgage, contact at least three mortgage lenders to compare interest rates and terms.
Home buyers can often lower their monthly payment and save thousands just by shopping around and lowering their rate.
Other Mortgage Qualification Factors
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All of these factors are equally important. For example, even if you have good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you’ll be approved for, and assumes youre an ideal candidate for a mortgage. To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
Current Minimum Mortgage Requirements For A Va Loan
VA entitlement. VA borrowers must provide a certificate of eligibility that shows enough military service to be entitled to a VA home loan. Most lenders obtain the COE from the VA directly, but current military personnel and veterans can also apply for it on their own online.
Down payment. VA loans dont typically require a down payment. However, you may need one if you try to buy a new home with VA financing, yet still have an unpaid VA loan on another home, or if you need a jumbo VA loan.
VA funding fee. Although VA loans dont require mortgage insurance, a VA funding fee of 0.5% to 3.6% may be charged to military borrowers to offset the cost of the program to taxpayers. The amount depends on your down payment amount, and whether youve used your home loan benefits before.
. The VA doesnt set a minimum credit score, but many VA lenders require a 620 minimum.
Employment. A two-year employment history is required, but exceptions may be made for military borrowers who are recently discharged from active-duty service.
Income. VA-approved lenders analyze your income to make sure its stable. Military training and education related to a non-military job may be considered for borrowers with less than a two-year income history.
DTI ratio. The VA recommends a total DTI ratio of no more than 41%. However, higher DTI ratios may be allowed if you meet the residual income test.
Occupancy. VA loans are offered for primary residences only.
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Buying More House Than You Can Afford
Its easy to fall in love with homes that might stretch your budget, but overextending yourself is never a good idea. With home prices trending upward, its especially important to stick close to your budget.
How this affects you: Buying more home than you can afford can put you at higher risk of foreclosure if you fall on tough financial times. Youll also have less room in your monthly budget for other bills and expenses. It can also crowd out other opportunities such as funding a retirement account, a childs education fund or savings for a vacation.
What to do instead: Focus on what monthly payment you can afford rather than fixating on the maximum loan amount you qualify for. Just because you can qualify for a $300,000 loan doesnt mean you can afford the monthly payments that come with it in addition to your other financial obligations. Every borrowers case is different, so factor in your whole financial profile when determining how much house you can afford. Likewise, its important to be completely honest with your lender or broker about your finances. At the end of the day, youll be the one repaying your loan, and you dont want to struggle with a bill you cant afford.
Ways To Lower Your Total Monthly Debt Payments
The key to reducing your debts is to create a budget and debt payment plan. By creating a list with your total monthly income on one side and all of your expenses on the other, you can quickly identify unnecessary expenditures, eliminate them and allocate extra funds to paying off your loans early. After coming up with your budget, you can use one of the following debt payment plans to chip away at your debts.
Although you can choose to focus on either increasing your monthly income or lowering your debts, its recommended that you do both simultaneously. Doing so will enable you to improve your DTI faster and ensure you can qualify for a mortgage when its time to apply.
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Avoid The Pitfalls When Determining How Much House You Can Afford
When determining how much house they can afford, people tend to use two basic strategies. Most base their assessment on how large of a loan lenders are willing to give them. But others use their current rent to determine how much they can afford to spend on monthly mortgage payments. The problem with these two approaches is that they tend to lead people to overestimate their budgets.
To know how much house you can afford, you not only need to think about how much you have saved but how much youll be spending. Even though youll no longer be spending money on rent, youll have a slew of new payments that you need to consider, such as closing costs, property taxes, homeowners insurance and fees. And if the home you purchase needs work, youll also have to factor in the cost of home improvements.
How Lenders View Retirement Income
Your income is one of the first things that lenders look at when they consider whether to extend you a loan. Many retirees assume that if they live on a fixed income, its impossible to buy a home. However, the truth is that you could buy a home as a retiree as long as your income meets your lenders standards.
Well take a look at how lenders view retirement income. Well also review a few other factors that lenders consider when you apply for a loan.
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Find A Home And Have An Offer Accepted
Once you are pre-approved for a mortgage amount and an interest rate, you have a good idea of what you can afford. You can then take that information to officially launch your home search. Work with a qualified and experienced realtor that knows the market and the area to make this process easier.
Also, keep in mind that just because youre pre-approved to borrow up to a certain amount of money by the lender, doesnt necessarily mean that you need to spend that much on a property. Instead, you should also consider factors like down payment amounts, taxes, renovations, closing costs, etc.
Once you have found the perfect property that you can reasonably afford, its time to submit your offer. Hopefully, your offer is quickly accepted by the seller with no need to negotiate. However, in this competitive market, negotiation may be necessary. Many buyers these days are offering well over asking price and waiving contingencies to make their offers more competitive. These are risky moves that are totally up to you.
After you have come to an agreement with the seller in terms of price and contingencies, your offer is formally accepted and youre ready to move forward in the process.
Give Your Credit Health A Checkup
Before applying for a mortgage, obtain both your credit score and your credit history report.
Youll want to verify there are no errors on the report or recent derogatory items like late payments. Since you may spend months shopping for homes, you might want to consider subscribing to a service that provides regular credit report monitoring for around $20 a month. You can cancel this after you close on your home.
As for your credit score, your estimated FICO credit score should be at least 680 and preferably above 700. Anything less and you may need to find a highly-qualified cosigner or take time to improve your credit before getting mortgage approval. The lower your credit score, the higher the mortgage rate youll pay.
Finally, do not apply for new credit in the few months leading up to your mortgage application. Banks get suspicious if it looks like youre piling on the new credit. My mortgage broker once told me that even getting a credit check for a new cell phone plan could require a letter of explanation to your mortgage lender.
Income And Employment Requirements To Buy A House
Next to credit, steady income and employment are other big requirements for mortgage approval. The lender must confirm that your income is consistent and enough to afford a mortgage payment.
For this reason, most lenders require 24 months of consecutive employment before approving a home loan application.
This applies to selfemployed mortgage borrowers, too, in which case youll provide your business and personal tax returns for the previous two years. Income statements must show consistent income over the previous 24 months, either remaining roughly the same or increasing.
Theres no minimum income to get a mortgage, but some loan programs have a max income limit.
Since a selfemployed borrowers income can fluctuate from year to year, mortgage lenders often average out their income over a twoyear period, and then use this figure for qualifying purposes.
Be mindful, too, of possible income requirements for the type of loan you want. Theres typically no minimum income requirement, but some programs do have income limits.
With USDA, for example, total household income must be at or below 115% of the median household income for the area. And if applying for Fannie Maes HomeReady or Freddie Macs Home Possible, your income must not exceed the limit set for your area.
How Do Lenders Determine How Much Mortgage I Qualify For
Before you figure out how much house you can afford, its useful to know how lenders calculate whether you qualify for a mortgage. Mortgage lenders determine your qualification based on your credit score and debt-to-income ratio .
Your DTI enables lenders to evaluate your qualifications by weighing your income against your recurring debts. Based on this number, lenders will decide how much additional debt youll be able to manage when it comes to your mortgage.
To see if youll qualify for a mortgage, you can begin by calculating your DTI:
Once you have calculated your DTI, you can evaluate whether its low enough to get approved for a mortgage. The lower your DTI, the more likely youll get approval.
If your total monthly debt is $650 , and your monthly income is $4,500 before taxes, your DTI would be 14%. A DTI of 14% is quite low, so youd be likely to obtain a mortgage.
Very rarely will mortgage lenders give a loan to an individual whose DTI is above 43%. After calculating your DTI ratio, if you find that its over 43%, youll need to work on lowering it.
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How Lenders Determine How Much House You Can Afford
Youre finally ready to get out of the rental market and buy a home of your own. But how do you know how much house you can afford?
Before you head out on your house-hunting adventure, you can easily do those affordability calculations yourself before you officially begin shopping for a mortgage.
Here are the top factors lenders typically consider when determining how much house you can afford.
How To Look Beyond The Monthly Mortgage Payment
Given the how much house can I afford rule of thumb, you now know that you can afford a monthly mortgage payment of $970. But thats only so helpful. Youre still probably wondering how much house you can afford?
Well, the answer depends on how much money youve saved. When you buy a house, youre going to need money upfront for closing costs and a down payment.
Closing costs are the fees associated with finalizing your loan, including application, origination, appraisal, credit report, title and attorney fees. Closing costs typically run about 5% of the purchase price of your home.
When obtaining a mortgage, you also have a down payment on your house, which is the money you pay upfront. The good news is that this sum is subtracted from your total mortgage amount. The more money you set aside for your down payment, the less youll have to spend each month on mortgage payments.
The cost of your down payment will vary based on the purchase price of your home and the type of loan you obtain. Conventional loans require borrowers to pay a more significant percentage of the purchase price upfront than do government-backed mortgages.
Conventional loans typically require a down payment of 3 20% of the purchase price. Yet, if you put down less than 20%, your lender will require you to pay private mortgage insurance fees to safeguard the mortgage company in the event that you default on your loan.
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The Six Main Types Of Mortgages
Not all mortgage products are created equal. Some have more stringent guidelines than others. Some lenders might require a 20% down payment, while others require as little as 3% of the homes purchase price. To qualify for some types of loans, you need pristine credit. Others are geared toward borrowers with less-than-stellar credit.
The U.S. government isnt a lender, but it does guarantee certain types of loans that meet stringent eligibility requirements for income, loan limits, and geographic areas. Heres a rundown of various possible mortgage loans.
Fannie Mae and Freddie Mac are two government-sponsored enterprises that buy and sell most of the conventional mortgages in the U.S.
Current Minimum Mortgage Requirements For Homeready And Home Possible Loans
The mortgage loan requirements for these conventional low-down-payment programs include income limits. Both Fannie Mae and Freddie Mac provide online lookup tools you can use to determine the maximum income based on an address you enter:
- For Freddie Mac Home Possible loans, use the Income and Property Eligibility Tool
Both programs have extra qualifying features such as:
Homebuyer education. HomeReady and Home Possible borrowers must complete a homebuyer education course before closing.
No credit score option. Homebuyers without a credit score can prove their creditworthiness with alternative data. For example, lenders may accept 12 months of consecutive, on-time rent payments, along with utility bills and car insurance payments, to prove your history of paying bills on time.
Additional income from a boarder. You can add rental income received from someone who has lived with you for at least 12 months to help qualify for a HomeReady loan. Youll need proof the person has lived with you for a full year.
Freddie Mac HomePossible loans only:
Alternative down payment sources. Home Possible guidelines allow for the entire down payment to come from sweat equity, which means you can convert your DIY skills rehabbing a home that needs improvements into cash toward your down payment and closing costs.
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How Does The Down Payment Affect How Much House I Can Afford
Its crucial to consider your down payment before determining how much house you can afford because the money you put down will drain a considerable amount of your savings. If you use up your savings on a down payment and have earmarked too much of your income for paying off your mortgage and other debts, youll find yourself in serious financial trouble should any emergencies or unforeseen expenses occur.
The higher the down payment you can make, the more equity youll have in your home after you purchase it. Lets take a look at how the size of your down payment would impact your home equity if you were purchasing a home for $450,000.
Although down payments can be lower than 20% of the purchasing price, you should really try to stay as close to that number as possible, especially if youre in the market for a conventional loan. You dont want to get stuck paying PMI fees. But more importantly, you need to remember that the less you put down now, the more youll have to spend each month on your mortgage payments and the less equity youll have in your home.