If you’re not paying cash for your new home purchase, then the first step you should take is to get pre-qualified for a mortgage. When you get pre-qualified you will know the maximum price you can pay for a home and can shop with confidence. If you do not automatically pre-qualify for the amount you would like to borrow, the lender will give you advice to follow to help you achieve your goals.
To pre-qualify you, lenders look at the following information:
- Employment History
- Credit History and Scores
- Monthly Income and Expense
Ideally lenders like to see an employment history of 2+ years with the same company, or in the same line of work. A few job changes with increases in salary and responsibility are not frowned upon. Stability of income is a very important factor to mortgage lenders. For salaried employees, lenders look at job history for at least the past two years. For those who are self-employed (considered if you own a 25% or greater interest in the business that employs you) lenders will look at profitability and cash flow of the company and also personal income.
Credit History and Scores
Credit history and scores also play a big role. Lenders order credit reports from local credit bureaus that collect information from retailers, banks, finance companies, mortgage lenders, and a variety of public sources on all consumers who use any type of credit. Credit scores are based on a statistical analysis of your credit history. Factors that determine credit scores vary from company to company, but are generally comprised of:
- 35% – history of past payments
- 30% – amount of credit outstanding compared to the credit limits
- 15% – age of credit
- 10% – mix of credit
- 10% – recent credit inquiries
The credit score many lenders use is the FICO score. FICO scores range from 400 to 900, with 900 being the best score. The higher the score, the less likely there will be a default on a mortgage. Therefore, the better the score, the easier it is to pre-qualify. Credit scores are viewed as accurate predictors of future delinquencies.
Monthly Income and Expenses
The monthly payment that you can afford can be estimated using two essential ratios: housing ratio and debt ratio. Housing ratio is determined by dividing your total monthly mortgage payment by your total monthly income. Debt ratio is determined by the sum of your total monthly mortgage payment and other fixed monthly debt payments divided by your total monthly income. A maximum housing ratio of 28% and a maximum debt ratio of 36% (28/36) are established national guidelines. However, some lenders may approve higher percentages if you can show that you can make the payment.
Stability helps, 2+ years in same line of work – income fixed or increasing.
- Cancel cards you are not using
- Clear any bad credit
- Make sure your credit report is accurate
- Not too many requests for credit
- Check your own credit before applying for a loan.
How much can you afford?
28% of gross income or 36% of all recurring expenses is a general rule, but your lender may be able to help you qualify for higher ratios.
Lock in the rate.
Shorter lock periods will lower the interest rate, but lock periods of 30-45 days are highly recommended.
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