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What A Lender Looks For in a Loan Application
So your ready to buy a home - not so fast.... Do you qualify? Wouldn't you like to know if you qualify before you spend any money and time looking at property and getting your hopes up?
Mortgage lending and their guidelines are changing at an alarming rate. How you qualified 4 years ago is completely different than today. The paper work required, the debt ratio's, what documentation they will accept and the processing proceedures are not as simple as prior to 2010. So BEFORE you spend ANY money, why not take a moment to prequalify yourself the way a lender does to see what you qualify for assuming your credit is OK?
On the left side of the calculator to the right, click on Affordability Calculator and fill in each box and click next. On step 4 they are asking you to put in the annual taxes and annual insurance. To find the annual taxes for a property go to Realtor.com and put in the property address. Under the Property History is the latest tax information on that property. Its not always 100% but it is pretty close.
Annual home owners insurance is a little trickier depending upon where you live. For instance if you live in Houston, Texas or Miami Florida, you will have to have flood and hurricane insurance, while in Dallas or Oklahoma you may have hail and tornado coverage and in California you would also have earthquake insurance. That being said, the cost for insurance will vary greatly. As a rule of thumb you can use .125% of the sales price to come up with the insurance cost. Keep in mind that that will be high on the high side however in most areas of the country.
For PMI, or Private Mortgage Insurance, if your putting 5% down put in .79%, 10% down put in .72% and 15% Down put in.50% for conventional loans. If you think you credit is less than average, put in 1.35% which is the very worst case scenario using FHA financing.
Once your click submit, you will see below Total Monthly Payments your Actual Front and Back Ratio's. Lenders preferable like the front ration to be about 28% and the back ratio about 43% but there are different programs available that have some flexibility to exceed those ratio's.
Now you know where you stand if you were honest about your debts. Next step, pull your own credit.
If you can not afford the myFICO.com, just click here or the Free Credit Report link in the menu to get your totally free report and make sure the debts you have put into the calculator match the credit report.
Things to consider when Pre-Qualifying:
The following example helps you understand the types of things your lender will be looking for as they pre-qualify you for a mortgage loan.
Gross Monthly Income
Calculate your total gross monthly income before taxes and other deductions. Your base income or salary can be used as it is. If you have income from commissions, over-time, or bonuses, you will need a 2 year history and this income will need to be averaged over the most recent 2 years. It must also be likely to continue. If you are self-employed, a 2 year average from your allowable net income will be used based on your most recent 2 years tax returns. A year to date P&L and balance sheet may also be required for your current year and averaged with your 2 years tax returns.
Credit is a critical issue when applying for any loan. The lender you ultimately choose will use the lowest middle credit score for all borrowers that intend to be on the loan. If you don’t know what your credit scores are, you can check your scores with MyFico.com or one of the other online services. Please note that your lender will also need to pull your credit report from all three repositories and the scores they get may be different from the scores you receive from one of these online services. Higher credit scores will usually get you a better rate and loan terms. For most loans, your minimum middle credit score will need to be above 620 or 640, depending on the loan program and lender requirements.
Down payment requirements vary from program to program. USDA (rural) and VA loans do not require a down payment for loan amounts up to $417,000. FHA loans require a minimum down payment of 3.5% of the sales price. The majority of conventional loans will require a minimum down payment of 5% of the sales price. Many loan programs allow gift funds from an acceptable source to be used for the down payment. Conventional loans with a down payment of less than 20% of the sales price will require mortgage insurance.
The longer you have been at your job or in the same line of work, the better. If you are self-employed, you will need to have been in business for a minimum of two years. Your lender will need your last 2 years tax returns including all schedules. If you are new to a job, but have recently graduated from college or a trade school, you will not likely need 2 full years on the job as long as your pay is hourly or salaried (commissioned earnings WILL need a 2 year history). As long as you have a solid 2 year work history, the length of time on a job may not matter as much either. For instance, if you have been employed with a company for only 3 months, but you worked at your previous job for the past 4 years—and your new job is similarly related to your previous job—then you should be fine.
Your qualifying ratios consist of two ratios. A Housing Ratio and a Debt to Income Ratio (DTI), expressed as 29/43. To calculate your Housing Ratio, divide your anticipated house payment (including taxes, insurance, mortgage insurance and HOA fees) by your gross monthly income and multiply by 100. To calculate your DTI Ratio, add your house payment and your total monthly debts (car payments, minimum credit card payments, student loans, child support, etc.) together and divide this amount by your gross monthly income and multiply by 100. The required housing and total debt ratios are typically 29/43, but will vary depending on the loan program, the lender and whether the lender receives an automated underwriting approval on your file or not. The DTI allowed on automated underwriting approvals can go as high as 45% to 50% and in some cases as high as 55%..
2010 - present
2010 - present