Are you prepared to leap into homeownership? For most people, home-buying means getting a mortgage. Some of these loans can take so many years to pay off. It will also cost you a lot more for the interest. However, it is not everyone who dreams of buying a home who qualifies to get a mortgage.
Having a clear understanding of what is needed for you to qualify for a mortgage draws the line between achieving your homeownership dream, and staying in that rented apartment for a longer time than you had planned. When you already know what to expect prior to applying for a home, you will have time to get yourself ready for the process. Here is what you need for you to qualify for a home loan.
- A stable income source
- Down payment
- A good credit score
- A DTI ratio lying within the allowed limit.
Stable income source
Most lenders will always focus on your cash flow. Will you be able to repay your mortgage? Every lender’s worry is whether you have enough money to settle your debt, and that calls for you to have a reliable source of income. Your monthly income is subject to evaluation before a lender can comfortably issue a mortgage. You will only be allowed to count the earnings that you have continuously received for not less than two years. Here are some of the verifiable incomes:
- A monthly salary
- Self-employment earnings
- Social security earnings
- Income from other properties
- Child support
- Any commissions or bonuses
- Invest profits, e.g. dividends
Debt to income ratio
Your credit history forms the other part of a lenders equation. Your existing debt could affect your ability to repay a mortgage. A high debt to income ratio is likely to deny you a chance to get a mortgage due to the fear that you might be overwhelmed by a high debt obligation. There are two DTI ratios:
- The front-end ratio- this is your total home expenditures divided by your per month gross earnings.
- The back-end ratio- this is the total amount of all your debts divided by your gross income every month.
For a qualified conventional loan, your back-end ratio should not be more than 43%. However, the ideal standard ratio that most lenders apply is a back-end not exceeding 36% and a front-end ratio of 28% and blow.
The FHA loans require a back-end ratio, not exceeding 43% and a front-end ratio of 31%.
VA loans need a back-end ratio of 41%.
USDA loans will need a back-end ratio of 41%, and the front-end should be 29%.
This is the money you pay for a home upfront from your pockets. It gives you some equity. Little or no down payment means that you are risking owing more on a home and it might be hard to repay, especially when you want to move. Most lenders will not accept a down payment from a personal loan, although if your credit profile is excellent, you can apply for a piggyback loan.
For a conventional loan, you need a down payment of 20%. When it comes to FHA loans, if your credit score is above 580, you need a down payment of 3.5 %, and 10% with a score of 500-579. Both USDA and VA loans don’t require a down payment.
A credit score is based on your credit history. A good credit score is considered to be 580 and above, and it includes factors such as;
- Your records of timely payments.
- Your credit utilization ratio.
- The combination of various types of loans.
- The length of your credit history.
- The number of times you check your credit report.