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Buying a home has always been the American dream, but financing your home can turn into a nightmare if you are not prepared. The information you provide the lender on your application determines whether you qualify for a loan, how much you can borrow and what your interest rate will be. Before you start the application process, find out What the Lender Looking For.
From the application the lender will be looking for these key items:
- Your Monthly Income
- Your Monthly Expenses and Debts
- The Down Payment
- Your Net Worth
Your Monthly Income – As a general rule, you can buy a house that costs up to 2 ˝ times your annual income. Your monthly income represents either your salary or self-employment income. It can also include non-salary income such as alimony or earnings from your investments, but you'll have to prove the income is regular. From your application, the lender will determine whether the combination of the mortgage payment, property taxes and insurance exceeds 28% of your total income. Any percentage below 28% is good. The lender will require verification from your employer if you have a job or if you are self-employed you will need to provide tax returns, credit reports and financial statements for your business.
Your Monthly Expenses and Debts – Overall, the lender is looking for a good credit history. Are you paying your debts timely? Are there any claims or liens against your salary or property? If you know of any credit blemishes on your record, clear them up before you apply for the loan. Also it is better if you don't apply for any new credit cards or car loans until after you get approved for the home loan. In general, keep your monthly expenses to a minimum, because the lender could deny your loan if your mortgage payment, property taxes and insurance and your other regular debt payments (i.e., credit cards, student loans and car insurance) are more than 36% of your total income.
The Down Payment – On the average, most lenders require a minimum 10% down payment. However, there are some financial institutions that accept down payments as low as 5%. Additionally there are some state and federally funded programs that allow individuals to qualify for a home loan with little or no down payment. The Federal Housing Administration (FHA) has a loan program that only requires a 3% down payment, but the FHA sets limits and assesses additional fees and requirements. Depending on your income level, you may qualify for a lower down payment through the Community Home Buyer's Program sponsored by the Fannie Mae (call at 800-732-6643). If you are a veteran, the Veterans Administration also has a low down payment program. Check with your mortgage broker to determine whether you may qualify for any of these federal or state programs. Remember, if your down payment is less than 20%, the lender will charge you mortgage insurance. Typically the first year's insurance premium is due at closing and an extra payment each month until your equity reaches 20%.
Your Net Worth – Through the application process, the lender is evaluating your credit worthiness and determining whether you are a good credit risk to them. They are asking themselves: Do you have the financial wherewithal to pay off your obligation to them? The amount and type of assets you own will help determine your credit-worthiness. Your assets include cash, bank accounts, investments and property. The lender will also evaluate what liabilities you owe, such as credit card debt, car loans, student loans and leases. The total value of your assets less your liabilities equals your net worth. The higher your net worth, the easier it is to qualify for a home loan.
The key to a smooth application process is to get your FINANCIAL house in order BEFORE you apply for the home loan.
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