Tuesday, January 15, 2008

How to Qualify for a Mortgage


The purpose of this article is to debunk the myth that qualifying for a home loan is difficult and time consuming. It certainly doesn't have to be! This easy, step-by-step guide will help you to not only apply for a loan with confidence, but increase your odds of getting an approval.


Difficulty: Easy

Things You'll Need

  • Calculator



Step One

Crunch the numbers.
The first step is to determine how much you can afford. Obviously, this is a major factor in determining a borrowers' ability to repay a mortgage. The good news is that the only debts the lender takes into consideration are the ones that appear on your credit report or paystub deductions. These are added to the proposed housing expense to determine monthly obligations. Remember that the housing expense includes monthly property taxes and home owners insurance in addition to the actual loan payment. So if you have huge utility bills, not to worry, it doesn't matter. But that 401K loan you're paying back will show up as a deduction on your paycheck stub. So don't forget to include that when applying for your loan. As far as income, it's usually calculated one of two ways: gross income year-to-date divided by the number of months you've worked so far during the current year or W2 income divided by 12. The monthly income is then divided by monthly debt to determine your 'debt ratio'. You want this number to be between 43-50% in order to qualify for most financing. For example:

Income = $5000/mo. ($60,000 per year)
Debts = $2000/mo. ($500 auto note & $1500 housing expense)
Debt Ratio = 2000/5000 = .40 or 40%

Step Two

Get it Together.
Now that you know how much you can afford, it's time to start gathering the documentation necessary to back it up. Remember, the burden of proof is on you, so everything that's stated on the application must be proven. For most loans, the lender will prefer enough assets to cover at least 2 months of mortgage payments (including the taxes and insurance). This money can be in your bank account, retirement plan, stocks, bonds, CD's, etc. If none of these describe your finances, a gift can be used in most cases. In other words, if a friend or family member is willing to give you the money and doesn't expect repayment, that usually qualifies as an asset. Here's a basic list of documentation required to obtain a pre-qualification letter for a mortgage loan:

Recent paystubs (1 month)
2 years W2s
Bank Statements (2 months)
Retirement Statement (if applicable)

These documents will get your file a preliminary approval before you go out and find the house. Your loan officer will request additional documentation once you do find your dream house.

Step Three

Pick the right loan for you and your family.
There are many loan programs available for a wide variety of borrowers. Even though one program may be great for some borrowers, that doesn't mean it's necessarily great for everyone. It's best to educate yourself so that the loan officer doesn't pressure you into a loan program that in his best interest and not yours. Here are the basic questions to ask your self/discuss with your spouse to ensure that the loan you pick will work best for you:

1. Will we live in this home for over 3 years?
2. If not, after 3 years will I likely sell the home or lease it?
3. What is the rate of appreciation for the area my home is in?

On average, most Americans move about every 3 years. Realistically consider whether your living situation is permanent (till death) or temporary (until a big promotion). If you plan to sell the house after a few years, then your best bet is an Adjustable Rate Mortgage (ARM). Since they are only locked for a portion of the loan term, these typically offer a low intro rate. The intro rate and payment is locked in for the first 1 to 10 years of a 30 year term. The key is to make sure that the loan is locked for longer than you plan to live in the house. Another thing to watch for is the length of time your loans' pre-payment penalty lasts. This is a 3-5% penalty assessed if you pay the loan off (through sale or refinance) prior to a specified period of time. They are more commonly associated with ARM loans and range from 1-5 years. So in other words, if you know you'll put the house on the market in 3 years, both the lock period of the ARM and the pre-pay must be at least 3 years so that you don't incur extra expenses. Suppose that you and your spouse plan to retire in the house and never sell or refinance, then a fixed rate is for you. In this case a pre-payment penalty is beneficial. In exchange for having the pre-pay, most lenders will offer a lower interest rate which could save you thousands over the life of the loan.

Contact me directly for further elaboration or additional information:
Nakia Frazier
(972) 953-9779

No comments: