If you want to purchase a home, you might wonder if you could get pre-approved. You could visit a loan officer and they could help you figure out if you'd qualify. Or you could do a few simple calculations at home to know if you're in the right ballpark.
Step 1: Is your credit score high enough?
Credit score requirements have changed a lot over the last decade. Chances are they will continue to vary, but right now you really need a score of at least 680 to get a good loan. Ideally having a score over 720 would enable you to get an excellent loan.
If your score isn't up there,
take action now to improve it. In our
April Newsletter I had an
article on what factors make up your credit score, how it's calculated, FAQ's, and several steps on how to improve your score. If it is very low, you can hire someone to help you raise it to the level you will need. Or you can
order your credit report and start handling any problems on your own with the credit reporting bureau's.
Links on how to pull your credit report are also
included in the
April Newsletter.
Step 2: Do I have enough income to support a house payment?
In order to figure out how much you can afford in a mortgage payment each month, you will need to calculate two numbers: the front-end ratio and the back-end ratio.
Front-end ratio: Your proposed monthly mortgage payment divided by your gross monthly income (before taxes). This figure should not go over 28 percent.
For example: Let's say you earn $5000 a month, gross. You can afford to spend $5000 x 0.28 = $1400 on your monthly mortgage payment. Note: This must include your principal, interest, taxes and insurance.
Back-end ratio: Your total debt obligations (credit cards, student loans, etc.) divided by your gross monthly income. This amount should not go over 36 percent.
For example: Keeping with the previous example, if you earn $5000 a month, you may spend $5000 x 0.36 = $1800 on your total debt obligations. So, if you have a mortgage payment of $1400, you can spend an additional $400 a month on credit card payments.
Step 3: Do I have the cash on hand that I will need to buy a home?
You will need to have money for a down payment and closing costs. There are government loans that allow you to put little or no money down, and ask the seller to pick up the closing costs. However if you get a conventional loan, you will need money in the bank for the expenses.
Lenders want to make sure that the money for the down payment is your money, not borrowed money. They like to know that you are personally invested in the home, because you are less likely to default that way.
You must show the money you plan to use for the down payment to have been in your bank account for at least 60 days. If you transfer it from another account, you must show that transfer and that you had the funds in that account for the time required.
Some lenders will allow you to receive a down payment (or part of the down payment) as a gift, but if you can have the money sit in your account for two months it is much easier.
If you have any further questions or concerns on this process, or would like a list of lenders to be referred to in order to explore this process further; be sure to contact
Kevin Chard in the office and he'll be happy to be of service to you.
