Getting Qualified

Getting Qualified

Buying a home can be one of your most significant investments in life. Not only are you choosing your dwelling place, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, we’re only a phone call or email away!

 

Credit history and scores can play a big role in the pre qualifying stage in the mortgage process. Lenders order mortgage credit reports from local credit bureaus, which gives individual credit history and scores.  Credit bureaus collect information from retailers, banks, finance companies, mortgage lenders, and a variety of public sources on all consumers who use any type of credit, including credit cards, car loans, mortgages, personal loans, and charge accounts.  The credit score is based on a statistical analysis of your credit history.  Factors that determine your credit score vary from company to company, but generally include:

  • 35% History of Past Payments – on all types of credit
  • 30% Amount of Credit Outstanding – balances on your credit cards and other loans compared to the credit limits for those loans
  • 15% Age of Credit – of all credit cards and charge accounts
  • 10% Mix of Credit – car loans, charge cards, mortgages, etc.
  • 10% Recent Credit Inquiries – suggesting that you are seeking additional loans or credit cards

 

Pre Qualifying

 

The first step in the purchase process is pre qualifying, which will determine how much a lender will lend you.  Most lenders use national guidelines to determine the maximum amount that they will lend.   Within the context of these standards, some lenders choose to be lenient and flexible, while others are strict.  To pre qualify you, lenders look at the following information:

  • Employment History
  • Credit History and Scores
  • Monthly Income and Expense

Let me know if you need to get pre qualified for a mortgage. I can connect you with local lenders that will help you.

 

Employment History

Stability helps, 2+ years in same line of work – income fixed or increasing

Unemployment is one of the two largest causes of mortgage foreclosure, the other being divorce.  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 when they pre qualify you.  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 & Scores

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.  These scores are viewed as very accurate predictors of future delinquencies.

Cancel cards you are not using.
Clear any bad credit
Make sure it is accurate
Not too many requests for credit
Check your own credit before hand

 

How much can you afford?

28% of gross income or 36% of all Recurring Expenses is a general rule, but your Loan Officer can usually help you qualify for higher ratios

The size of the mortgage that can be afforded monthly, can estimated through two essential ratios: housing ratio and debt ratio.  Housing ratio is determined by your total monthly mortgage payment divided 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.  If these ratios are too high, lenders may decide to deny the application.  For pre qualification purposes, the maximum housing ratio of 28% and a maximum debt ratio of 36% (28/36) used to be national guidelines.  However, today, you can get by with much higher percentages, if you can show that you can make the payment.

Some lenders evaluating a credit application are not tied down by strict industry standards.  They will look at your loan request and see if it makes sense.  If further explanations of any situation that will make your application look better, then by all means do so.   Document all claims and explanations in writing if possible.

 

Lock in the Rate

Shorter lock periods will lower interest rate, but lock periods of 30-45 days are highly recommended

Interest Rates

As you start shopping for a home loan, your first question of each lender will probably be “What’s your interest rate? How much are you charging?” Interest rates are usually expressed as an annual percentage of the amount borrowed. If you borrowed $120,000 at 10% interest, you’d owe interest of $12,000 for the first year. With most mortgage plans you’d pay it at the rate of $1,000 a month. You would also send in something each month to reduce the principal debt you owe – and the next month you’d owe a bit less interest.

When your grandparents bought their home (putting at least half the purchase price down, by the way), their interest rate was probably around 4 or 5%. Rates stayed the same for years at a time. Then in the years following World War II, things became more turbulent. As economic changes sped up, rates began to change several times a year. By the l980s, lenders were setting new rates on mortgage loans as often as once a week – and they still do today. When inflation hit a high in the ’80s, some mortgage loans carried interest rates as high as 17% – and those who absolutely needed to buy, paid that much.

Rates dropped gradually through the 1990s, and by 2000 had reached their lowest rates in decades. Continuing into the millennium, home buyers appear to have the most favorable conditions for mortgage borrowing since their grandparents’ days – and without 50% down payments either.