Monday, February 1, 2016

Do Your Homework Before Buying

   Are you ready to jump in feet first and become a homeowner. Tired of throwing your money away on renting. The process of buying a home can become intimidating. The best way to prepare for the home buying process is to realize that you first have to understand the mortgage requirements and it is a very expensive learning experience. The very first thing you have to do is work on the qualifications for a mortgage which can help you avoid many mistakes made by first time buyers before you start the application process. 
   First off, let's make sure we have a down payment although it is still possible to buy a home without a down payment, it's best to have that in your hot little hands. One of the mortgage requirements that will determine whether you're eligible for a loan is your mortgage loan-to-value ratio (LTV). A minimum credit score is yet another qualifying requirement that must be met. You will certainly have a better chance of getting that loan if that ratio is more in your favor when the amount you're borrowing is less than what the appraised value of the home you're purchasing and under 80% is optimum which is why having a 20% down payment is almost a requirement. The lower the LTV means that lenders will give you a more favorable interest rate as well as increase your chances at qualifying. 
   The best thing to do before starting the process is to determine how much home you can afford. The amount of your down payment, your income or combined incomes if you and your spouse are buying, how much debt you have will determine how much house you can afford. There are several ways you can do that and one easy way is to use a home affordability calculator. You can find one online and plugging in the numbers will determine your price range and may even help you get pre-qualified from several of today's best mortgage lenders. A mortgage professional can also help you in this endeavor.
   When you decide that it's time to start the loan qualification process you may run into two things that lenders call "pre-approval" and "pre-qualification".  Let's look at the difference between the two terms.  Pre-qualification does not require that you provide a social security number and allows you to compare loan details without running your credit report. Pre-approval on the other hand means that your lender will run your credit and there is an evaluation process that determines your financial ability to tack on a mortgage loan. This evaluation will  be the most accurate way to get you a loan and will require your social security number/s and results in a hard loan qualification process through credit reporting agencies. 
   The ideal number to put on the table when the decision to buy is realized is to have that 20 percent down payment. However, sometimes it's not always easy to come up with that much cash so even if you have 10 or 15 percent, it can still happen. The more you put down at closing the better position you'll be in at the end of the process on both interest over the length of the loan and your payment may be lower also. Also, something you may want to consider is that if you put done less than 20 percent you may be required to buy mortgage insurance,
  Now let's look at the debt-to-income ratio and most lenders require that your total debt including car loans, credit card bills, student loans, and any other debt be less than 36 percent of your gross monthly income. As an example if your income is $10,000 dollars per month your debts cannot exceed $3.600 dollars a month. If your ratio is too high consider paying down high interest credit cards to get under the required limits. Also you have to take into account that when you budget for a home mortgage payment you must include property taxes and property insurance among miscellaneous expenses like a mello-roos tax or HOA (Homeowner's Association fees). A Mello-roos is a special tax imposed on some local districts. 
   The next thing to worry about is the dreaded credit score which is a major factor in determining your eligibility for a mortgage loan. Being able to maintain a credit score over 720 or better will enable you to get the most favorable mortgage rates. If your credit score is not in the 720 range or better you may still get approved but will certainly not qualify for today's best rates and we know what that means. It means a higher interest rate and a higher payment unless you have more money to buy down the rate. If your credit score is 620 or less and you do not have 20 percent down you may find lenders that will deny your application. This is not the final word on your ability to buy  and only means that you may need to apply with lenders that deal with subprime loans. Those subprime loans are lenders that will charge much higher interest rates and fees because it is a riskier loan and there is a higher risk of foreclosure for the lender.  
   Your ability to repay your loan may depend somewhat on your employment history which is very important in the lending process. If you have been working for the same employer for two or more years will entitle you to favorable consideration on obtaining that mortgage loan. Someone who moves from job to job without achieving longevity does not bode well with lenders. If you are self-employed or work on commission you may have to provide bank statements for proof of income. The best advice for the home buyer is to do your homework and know about how much house you can afford. Planning ahead will also avoid headaches in the application process for loans that you may not be qualified for. The enjoyment of buying a home should be as stress free as possible so you can enjoy your purchase. Make sure you know which banks will be the best ones to apply to have a higher probability of obtaining financing. 
   A new homeowner was under the impression that the formula for how much you could afford was  about three times your gross income. That was the old formula. It is no longer viable and has been proven to be unreliable. Lenders feel that realistically they must look at the individual budget and figure out how much money there is and what the monthly payments will be. Factoring into the equation not only  the mortgage but things such as taxes. maintenance, insurance and other expenses. Usually lenders will shoot for  monthly payments in the 28 to 44  percent range of total gross income. Factoring in the credit history and FICO score into that number may exceed those limits but it is not disqualification and you could still get approved only on a case by case basis. 
  Make sure that you check your credit history periodically with requests for your  history to stay on top of that aspect in the borrowing process. Through a credit report, borrowers can obtain the credit score (FICO) and credit history and stay abreast of any abnormalities before the qualification process starts. There are three major credit bureaus that most lenders use so make sure you look at all three, TansUnion. Experian, and Equifax. 
   The higher your FICO score the better rates you should receive and the better your chances of obtaining a loan will become. This also makes it much easier to pre-qualify for the loan and may well get you in the door. The credit history is very important in the home buying process. If you have issues in your credit report, make sure you clear those before applying for a loan. To clear up these derogatories you must do it through the postal mail process which will take a few weeks and sometimes months. This process should be done at the earliest point in the buying process.  
   Most realtors would prefer to have a buyer  be pre-qualified and the gold standard is to have buyers that are pre-approved. That scenario will give the realtors options on the areas that the buyers can search for their dream home. 

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