Buying a house can be one of the most exciting times in your life but it can also be one of the most frustrating if you are not prepared. The first step in the home buying process often deals with getting approved for lender financing. The number of loan programs and the process in which loans are underwritten has undergone plenty of changes over the past five to ten years. In today’s lending environment wanting to buy a house is not enough; you need to have all of your documentation ready and be prepared for whatever is needed along the way. Regardless of what price range you are buying in and what kind of loan you are looking for, the approval process is still based on a few core items.
Any loan approval starts with your credit score. There are three major credit reporting companies that can provide a score between 350-850. An excellent score is anything over 720, verses on the flipside a poor score is 500 and below. This score is based on timeliness of payment, availability of credit in each account, number of accounts opened, how long they were opened for and a couple other factors. The higher your middle score out of the three companies is, the more mortgage options you have. If you score is low you may have to put more money down to get approved or be subject to a higher interest rate. Before you do anything else in the loan process you need to find what your credit score is.
Aside from your credit score, the second most important factor is your down payment amount. There are loan programs available that will allow you to only put down a minimal amount (if your credit score is high enough). Also there are programs particularly for investors, that require at least 20% down payment. The down payment has a direct impact on your monthly payment, loan approval and what products you are qualified for. In addition, you need to have the money available in your account for at least sixty days. As soon as you think you are going to buy a home–even before you begin looking at homes–put your down-payment money into an account immediately. Not having it in the bank for the required seasoning time can delay your purchase.
The final basic piece in loan approval is your debt-to-income ratio. Making money is a good start but if your debt exceeds your income you will have a tough time getting approved. A mortgage broker or lender can help you figure this number out, and don’t assume because you make a good salary that you will be automatically qualified for a loan. All of the monthly debts on your credit report and your new mortgage payment are factored into your debt-to-income ratio. If this number is higher than 45-50% everything else on your application will be for naught.
Getting approved for a mortgage can be another stressful part of the home buying process. So before you decide to buy, figure out what you are qualified for and what steps you need to take. Speak with a mortgage professional to help you get started on the path to home ownership today.