If you're ready to buy a home and have narrowed in on a price range you might be ready to pursue the next step: qualifying for your home plan. While this is usually a pretty straightforward process it can be tricky especially for beginners. It never hurts to be prepared ahead of time when qualifying, so here's a list of things to consider before you apply.
An old but outdated formula for determining if you could afford a mortgage was to determine your overall income. Realtors estimate that you could afford a full mortgage that equaled about triple your annual earnings. Unfortunately, this is simply an oversimplification. It doesn't really account for the whole puzzle, but rather a piece.
Typically most in the real estate business understand that an affordable mortgage should be more determined on the basis of the monthly payment. The estimation for an acceptable payment usually falls between 28%-44% of the buyer's income.
Needless to say one of the first things a lender is going to look at is your credit score and history. Credit is a pretty basic concept. If you pay your bills on time you will likely have a higher score but a lower one if you pay late and or go back on your debts and financial commitments. The higher your score the better your chances are at approval. Not only will you find loans approved, but better rates and lower down payment options will become available as well.
Always check your credit history for any errors or problems and have them resolved. Sometimes issue that can be fixed may arise from identity theft or other forms of fraud. Have these all taken care of before you go to the bank for your mortgage.
The Two Ratios
There are two main ratios finally considered by all lenders before a final decision can be made. The first ratio is debt to income, which takes into consideration any outstanding loans that will carry monthly payments for close to a year a more before they're fully paid. The other ratio has to do with your total housing costs compared to your income. As long as these add up, it should be smooth sailing.
So once you've considered the main factors you can go in. Your loan is likely to be approved if your credit score is high and your monthly payments match your income requirements. A few red flags will be raised if you have any outstanding issues like maxed out credit cards or recent bankruptcy.
If all is well, however, you should receive a letter of pre-approval and hear the good news in a few days time.