Requirements for Purchasing a Home
5 Primary Financial Requirements for Purchasing a Home
Owning a home gives you freedom, privacy and tax deductions for your property taxes and mortgage interest. According to Habitat for Humanity, the children of homeowners do better in school, have fewer discipline problems and go on to earn more money than children of non-homeowners. But before you can buy a house, you have to get your household budget in order.
Gather Your Information
'Every lender has its own checklist of personal and financial information that it requires before approving your mortgage loan,' says real estate agent Anita Cordell. At a minimum you'll likely need your Social Security number; addresses going back at least two years; current and past employment information; verification of your current income, such as check stubs; banking information, including types of accounts and the assets in those accounts; federal income tax returns for the past couple of years; and information about your living expenses and other debts. 'Gathering your basic financials into a single folder will make the process go smoother,' she adds.
Demonstrate Sufficient Income
'You must be able to show your lender that you have sufficient income to make your mortgage payments as they come due,' says Cordell. Each lender has its own standards, but most use a formula to determine a qualifying ratio that you must achieve before they will make the loan. Qualifying ratios typically range from 26 to 29 percent of your gross monthly income, depending on whether you're going for a conventional or government-backed loan, such as FHA or VA. For example, you'll need a gross monthly income of $4,000 to qualify for a mortgage loan with a payment of between $1,040 and $1,160, including principal, interest, property taxes and homeowners insurance.
Control Your Debt
Paying down your existing debt before you apply for a mortgage loan can help the process. The more debt you carry, the less home you can buy. Lenders combine your housing expenses with your long-term debt, meaning any debts you carry for over 11 months, to come up with another qualifying ratio. Depending on whether you're applying for a conventional or government-backed loan, these ratios range from around 33 to 41 percent, so if you're carrying significant long-term debt, it can reduce the amount of mortgage debt you can qualify for. For example, with an FHA loan, if you make $4,000 per month, your combined mortgage payment and long-term monthly debt payments can't exceed $1,640.
Keep Your Credit Score High -- and Accurate
Before a lender will give you a mortgage loan, it wants to know that you have the ability to make your monthly mortgage payments, and that you have the willingness to do so. Your willingness to repay your debts is typically reflected by how you have handled your debt obligations in the past. Your lender will check your credit report to see how you've done. You have the right to check your own credit report from the three major credit reporting companies, free of charge, once per year. 'Your credit report is not always accurate, so it's a good idea to check before your lender does, just to make sure there are no surprises,' Cordell advises. 'That way, if you find errors you can correct them before they cause problems with the mortgage lending process.'
Save a Down Payment
Mortgage lenders like to know that you have a commitment to the home you want to buy. Your down payment is your skin in the game. Conventional lenders typically ask for a 20 percent down payment, but if you apply for a government-backed loan, your down payment might be as low as 3.5 percent, or even less. If you want to buy a $200,000 home with a conventional loan you'll need a down payment of around $40,000. If you go through an FHA lender you would only have to put down around $7,000. The trade-off of making a lower down payment is that you'll carry a larger loan balance, which results in a higher monthly payment. You'll also be required to carry mortgage insurance, which will also add to the amount of your monthly payment.
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