Qualifying For Your Next Home Loan

When you are selling a home, the natural question is “How will afford my next home?”

If you are relocating to a new area, you need to check with lenders making loans in that state. Your current lender may not make loans out of state, or if they do it is most likely that there will be different requirements as each state has it’s own legal requirements of lending institutions.

Another issue is that you may find that you need to supply the lender with more and different paperwork from the last time you sought a loan. This is not unusual as the economic meltdown of the mid-2000s led to much scrutiny and re-structuring of  lending requirements. Today, in California, we are seeing many more checks on the borrower’s financial standing before qualifying for a mortgage loan. This includes checking things yet again before wiring any money to the settlement services company for the sellers of your next home.

Let’s identify some of the requirements a lender looks at to determine whether you can qualify for a home loan. This information can be helpful if you haven’t experienced getting a home loan for quite some time.

Credit

Your credit is one of the biggest things a lender looks at when you apply for a home loan. The length of your credit history, ability to pay loans, and whether you’ve maxed out your loans or credit cards will all come into play. These are factors in determining your credit score or rating. Based on your credit score, a lender will be able to gauge the likelihood that you’ll be able to pay them back. Credit scores also determine the interest rate a lender will offer – a higher credit score often results to a better interest rate.

Along with your credit score, lenders will also take a look at your credit report. Some of the biggest factors they’ll look for are whether you have accounts open for at least a year, and whether or not you have any outstanding collections on your accounts. If you have any collections or judgments on your credit report, it’s best to settle these first before you get financing. You can get a copy of your credit history by sending a written request to each of the major credit bureaus. The report is free as long as you only order it once a year. While they will not release your credit score, the report will help you determine if there are any creditors (past or present) who are reporting you as being late in making payments or missing them altogether.

Should you find any issues in your credit history, once you have verified the accuracy of the report, start by settling bank judgments or old accounts in order to ensure your credit history is free from issues. After you do this, it’s only a matter of time, about a month) before you see your score tick up and your credit history show your good standing.

If you have already sold and are moving into a rental to give yourself the time to find the right house for you, keep in mind that your rental history will also be taken into account, even if it doesn’t show up on your credit report. Lenders take a look at your rent or mortgage payments over the past year or so – as little as one late payment can make it difficult for you to qualify.

Down payment

The minimum down payment required to purchase a home is usually around 3-5% of a home’s total sale price. This will allow you to get a loan from the Federal Housing Administration, or FHA. An FHA loan is a terrific option for first-time buyers or anybody who won’t be able to pay a large down payment. With an FHA loan, you also won’t need to worry about being penalized with higher interest rates if your credit score is less-than-perfect.

In addition to down payment, it’s a good idea to set additional cash aside for settlement fees. The amount of settlement fees may vary depending on the type of loan or area where you plan to buy, so it’s best to contact a trusted lender for more information.

Debt-to-income ratio

Lenders will also take a look at your debt-to-income ratio, or DTI.  Your DTI consists of your fixed expenses (mortgage payment, homeowners insurance, credit cards, property taxes, car loans, etc. ) with the new mortgage compared to your gross monthly income. Lenders usually want to see a buyer spending less than 43% of their income on these fixed expenses.

Prepare to make a down payment

Some buyers may not be aware that a down payment is required to buy a home. You can try qualifying for a loan from the Federal Housing Administration that will allow you to make a down payment of 3.5% of a home’s purchase price or even a conventional loan requiring only 3% down. For conforming loans without mortgage insurance, you need to make a down payment of at least 20%, unless you are a First Time Buyer (meaning you have not had a mortgage in the last 36 months). If so, there is  a loan with no mortgage insurance if you have 640 or more middle credit score.

Get pre-qualified

Getting a loan pre-qualification is a smart move, especially for buyers returning to home ownership after renting for a while. Many sellers and real estate agents want to know a buyer has been vetted properly before considering their offer. They do not want to accept an offer only to find out the buyers are not able to qualify for a loan.

Create a strategic plan

Do not assume you’re ready to buy a house – it’s very important to address any outstanding issues you may still have. Before you start looking for a home, you should consider consulting a real estate professional in advance. It’s always a good idea to start early, and working with a realtor is a great way to solidify your plans, so you’ll have a strategy to follow.

If you’re planning to buy a home before, during or after selling your current home, I’m ready to work with you every step of the way! You can call/text me at (760) 622-5087, or send me an email at fakri@fakrizubek.com