The Right Way to Get Approved for Property Mortgage
What is the best way to get a housing loan? As millennials start searching for homes, it is important to understand the financial aspects of the process.
The best thing you can do is to get pre-approved. Without pre-approval banks are not obliged to approve your loan and sellers cannot think of you as a serious home buyer.
First things first…. Gather Your Documents
Loan approval process is time-consuming. Do not delay the setup by submitting the wrong information. That means taking a detailed look at what you can afford. Understand what the bank wants from you, what kind of questions you need to answer and what are your responsibilities once the loan has been approved.
The bank will ask you to send a few documents like the employment proof, your social security number, income reports, tax papers and your credit history. Keep these papers ready in a separate folder and prepare to answer the next question.
What Can You Afford?
Let’s suppose you can afford to pay $850/month for mortgage payments.
Enter these values in the Zillow mortgage calculator and here is what you get:
Affordable Mortgage Loan = $172,793
(The down payment should be near to $60,000. The calculator also takes into account the insurance, property tax and PMI.)
As a general rule, always subtract 20% from the affordable amount. If what you can afford is $172,793 then you should go along with $138,234. The remaining 20% will be used for home remodeling, property taxes, insurance and moving costs.
How Will a Lender Assess Your Ability to Pay the Loan?
Higher Credit Score
You need a credit score of 580+ to apply for an FHA loan with a 3.5% down payment. However, most lenders will not accept the standard score. You need a credit score above than 600. Any score higher than 640 gives you the freedom to choose and compare different mortgage products. With a score of 640 or more, you can talk to various lenders instead of waiting for anyone to approve your loan.
What if My Credit Score is Lower than 580?
Do not buy a house yet because you will be paying crazy interest rates over the next 30 years. Work hard to improve your score. Ask your credit companies to increase the available credit which will automatically raise your FICO score. Be careful not to spend this money. Be regular with your loan payments, wait for a few months and reapply for the mortgage.
What’s Your Income?
Banks are not interested in your monthly income. They just want to know whether you make enough to pay the mortgage
. Expected mortgage installments should be less than 33% of your monthly income. If you are earning $5500/month, you can safely apply for a $1000/month mortgage provided you have a good credit history.
A $5500 income and a mortgage payment of $1000 equals a DTI of 18.18%. FHA loan requires a front-end ratio of maximum 31%. The back-end ratio should not exceed 43%.
Be honest while reporting your income. Banks will verify this information from different sources. Any discrepancies in the record may result in immediate rejection of your application.
Do You Have Any Other Loans?
Having a car loan or student debt does not make you disqualify, but indirectly, it may be considered a negative point. The bank management will judge how have you been paying the previous payments. If the debts do not make 40% of your total income, then you are eligible for the housing loan. Otherwise, you must pay other loans before applying for a new one.
Down Payment Percentage
A 20% down payment is the best approach. FHA allows you to submit a payment of 3.5%, but if you do not want to pay high-interest rates, your best bet is to finance 20% of the property.
About the Company:
JJW Homes LLC is a leading residential redevelopment company in SF Bay area. The company assists homeowners with various situations including foreclosure and short sales. This article is written to educate consumers about the mortgage approval process so they can apply for affordable loans. By doing so, we hope to reduce the number of foreclosures in upcoming few years.
[Photo Credits: GotCredit & Investmentzen]