You finally found the perfect house and you’re close to realizing the dream of owning your own home…so close that you can taste it. It’s a great time in your life but are you really financially ready to achieve these goals?
Home Loan Resources
To get the best home loan rates, you can conduct online loan requests. Try out these web resources to obtain multiple loan offers from several competing lenders. You can submit a loan request to to start with, or you can using LowerMyBills.com.
After receiving your loan offers, the next step is to actually get the loan of your choice. But keep in mind that before you can obtain loan approval, there are a few requirements you’ll need to fulfill.
What Do Lenders Want To Know About You?
Before mortgage lenders can grant you a loan, they of course would like to make sure you can repay them. Your finances will be pored over like never before, making this experience quite overwhelming especially for first-timers. There are many questions and a mountain of papers to fill out and sign before you even know if the house you have your eye on, can be yours. Mortgage lenders will need to consider your personal finances very carefully before making a decision. They’ll need to know:
- your credit history
- your gross income each month
- the amount of money you plan to use as a down payment
among other things.
The Debt-to-Income Ratio Explained
A big part of the lender’s concern is your debt-to-income ratio. There are two calculations used to determine this number:
Front-End Ratio
This calculation determines how much of your pretax income will go towards your monthly mortgage payment. The mortgage payment figure includes interest, principle, taxes, and insurance and typically should not go over 28% of your gross monthly income.
Annual Salary x 0.28 / 12 (months of the year) = Maximum Housing Expense
Back-End Ratio
This calculation determines the amount of your total gross income that will go to pay all of your other obligations, including the mortgage, other loans, child support, credit card bills, and any other monthly debts. The figure should not exceed more than 36% of your gross income.
Annual Salary x 0.36 / 12 (months of the year) = Maximum Allowable Debt-to-income Ratio
Different lenders will have different requirements for the debt-to-income ratio. For instance, conventional loans — typically a conventional loan from a bank or other mortgage lender — will require no more than 26% to 28% of month gross income for housing costs and not more than 33% to 36% of monthly housing plus debt costs. With an FHA loan, the housing costs should not exceed 29% of the monthly gross income and 41% of the monthly gross income.
Other Factors Considered For A Mortgage Approval
Other factors mortgage lenders will consider in their calculations for a mortgage approval include the cost of your real estate taxes and homeowners insurance. Property taxes can be determined by talking to your real estate agent or contacting the local tax office for more information. Homeowners insurance is a requirement for obtaining a mortgage and an estimate can be acquired from a local insurance agent. Make sure you have an accurate quote from the agency to get the right estimate.
Some areas will require additional coverage for floods and other hazards, depending on the location of the home. Also, if your down payment is less that 20%, you will be asked to obtain mortgage insurance or to take out a piggyback loan in order to reduce the initial loan to 80% of the purchase price.
Before you begin looking or getting all excited about a great house you have found on the market, take some time to get information about prequalifying for a home loan. This may save you a lot of time and trouble when house-hunting.
The fact is, you’ll be better prepared to offer a respectable down payment when you know exactly how much house you can afford. Putting in some research, preparation and time to understand your financial circumstances prior to buying a house will allow you to negotiate a better deal and possibly make the home buying process move along more smoothly.
Guest post by Tisha Kulak
Image Credit: The American Chronicle
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Excellent rundown! I’ve heard that the 28/36 figures were relaxed in recent years and have really tightened back up in the wake of the subprime mess.
If the sand castle is my house on the Florida coast, what does the coming storm represent?
The storm signifies the bottoming out of the real estate market in the coming year, if it’s not here already.
It was a subliminal message…. we all need to hunker down and be prepared.
Something to keep in mind frugal dad: its tightening up a bit, but for people with good credit things haven’t changed THAT much. Remember, 97% of all homeowners are paying their mortgages on time, its the 3% that are causing the mess…
Great post. Very informative. It is worth noting that some with decent (but not necessarily great) credit are being shut out. But those with excellent credit will always be able to get a loan.
Mortgages aren’t really that bad a thing though. You are given all that money and if something does happen in your life that drastically changes your Personal finance you still have that money as backup. If you were paying without a mortgage and there was a crisis then you wouldn’t have all that extra money to stop your fall.
Nice detailed post. Credit scores, LTV, and assets now play a very large role in mortgage qualification. Those with lesser scores, but a DTI ratio below 43 should consider an FHA loan, as they are less score driven, yet provide very competitive rates.
Interesting to see that in the US is not that different than here in the UK. The amount to put down as deposit increased on most products available, but there still are loans available for applicants with impaired credit.
Merging all your debts into your mortgage loan can be both good and bad as a solution for debt consolidation. With the current rate of interest you can certainly benefit from this low rate compared to an equivalent stand alone loan which is secured on your property. However, what some people fail to recognise is the increase in mortgage payments could become a struggle. Assuming that people are already struggling, and hence the reason to consolidate in the first place.
As such the persons property can become even more at risk if they can’t make the payments due to the increased mortgage. Another option would be to take out an unsecured loan. Although the interest is higher, the flip side is you won’t lose your prooperty if you can’t make payments.
Hi,
your readers might find this article useful also:
http://www.thinkmoney.com/expert-loan-views/1199/debt-consolidation-loan-vs-iva.asp
Thanks!
Nowadays you can’t go near a mortgage with an LTV approaching 80% and your FICO better be over 720.
Good piece by the way…..
Nice write up, I am hoping the fed actually does that 4.5% mortgage rate rumor that is going around. I know I would be looking to buy then.
Lots of info I already knew but LOTS, even more I didnt. Thanks for all the work you put into this blog. I’ve really gotten a lot out of it.
A very comprehensive and an elaborated article. Yea it shows the decline in the real estate market. But still those whose have good credit and who show proper maintenance will be granted loans though.
My husband and I were trying to refinance our home mortgage and we found sites to put us at ease during a very scary, and like you said, very overwhelming, first time experience.
Great post! Thanks!
Mortgage loan modification has helped a lot of home owners in the verge of losing their homes. You certainly have everything to gain when you go for a loan modification.