How Do I Qualify For A Home Loan?
Congratulations! You have decided that you are ready to make a big step in purchasing a home. Whether you are a first-time homebuyer or you purchased a home years ago, the same rules are going to apply.
In order to qualify a buyer, lenders are going to begin by asking you a few simple questions. The more prepared you are to answer these questions and provide the documentation they require, the easier your pre-approval process will be.
Understanding Your Debt-to-Income
Debt-to-income, also referred to as DTI, is not a hard calculation to understand. Lenders are looking at your credit liabilities such as auto payments, student loans, credit cards, personal loans, etc.
They are not factoring in your cell phone, utilities, or insurance. You will want to list these out along with their monthly payments, and you will add the totals.
You will then take this debt number and divide it by the total gross income that you receive for the month. This should provide you with a percentage. It is important to note that your debt, plus your new mortgage, taxes, and insurance, will all have to comply with the guidelines set for your qualification.
Depending on what loan product or program you are using, the required percentage may be somewhere between 45% to 55%. If you find that your numbers come in way below the 45%, you may qualify for more programs, different benefits, and additional purchase price.
Understanding How Much Money You Need
Different programs have different conditions to close a transaction. Your real estate agent will likely be able to help you understand all the conditions. They are very evident in the down payment required and how much you can ask the seller to help with your closing costs. Throw out the idea that you have to have 20% to purchase a home.
Most people choose to purchase a home with an FHA loan or a Conventional loan. Understanding these options will give you a better understanding of just how much money you need.
This is easier to understand if we look at simple numbers. Say you are purchasing a $100,000 home, and you are estimating that your closing costs are at $6,000:
FHA allows you to put 3.5% down and ask the seller for 6% in closing costs. The 3.5% down payment is $3,500, and your sellers agree to the full 6% or $6,000. This would mean that you need $3,500 plus the cost for appraisal and inspection.
Conventional, typically, wants a minimum of 5%, and it allows you to ask for 3% in closing costs. This puts you at $5,000 for down payment, $3,000 for closing, and a total of $8,000.
This is oversimplified, but it gives you a good idea of how to plan for how much money you will need. If you are unsure of the closing costs, ask your real estate agent for some guidance.
Know What Documentation You Will Be Asked For
Documentation will vary from person-to-person and by situation. However, there are some minimum requirements that you can start gathering.
* ID – Make sure it’s not expired and info correct
* 30 days of paystubs – Noting name, period, wages, bonuses, commissions, and year-to- date
* Last 2 years of W2s – Showing history of income
* Last 2 years of Tax Returns (all pages) – Showing history of income
* 60 days of asset or bank statements (all pages) – Showing the funds for the transaction
The Preapproval Process
Every lender is going to approach it differently, but they will follow the same guidelines. They will ask questions, request documents, and get you pre-approved.