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Home Loan Requirements

A Complete Guide to Home Loan Requirements

Like most big moments in life, buying a home can be an interesting mix of exhilaration and apprehension. Much of that apprehension can be traced to the intimidating process of applying for a mortgage. The process can be a long one, so before you do anything else it’s important to know if you meet the home loan requirements.

Why Home Loan Requirements?

Few people can afford to buy a home up front. Home loans are designed to make home-buying more affordable by paying the cost up front for you and then having you pay back the loan, plus interest, in a certain set of instalments.

However, when dealing with loans this large, lenders are taking up a large amount of risk. To increase the odds of getting a return on their investment, lenders will have a set criteria of requirements to determine your eligibility in applying for a home loan.

These criteria will change depending on who your lender ends up being so it would be a good idea to shop around before making any final decisions.

Credit Score For Mortage Rates

This is the first thing a lender will look at, so make sure to check your credit score before applying for a loan.

Credit scores are the leading factor in determining your mortgage rates, which is the interest you will be paying on your loan.

How good your credit score has to be will depend on the lender. Generally, though, a credit score of 720 or better will qualify you for the best mortgage rates.

Having a credit score below 720 won’t automatically disqualify you. However, expect to be paying an interest rate of around 4.25 percent with a credit score of 620 as opposed to 3.25 percent at a credit score of 720.

This might not seem like much, but when you factor in the cost of 4.25 percent on a $300,000 mortgage you’ll end up paying thousands more in the long run.

If your credit score is below 620 you still won’t be below all home loan requirements. However, you will likely need to apply for a non-qualified mortgage loan where the interest rates can be anywhere from .75 to 1.5 percent higher.

If you have the spare money to pay these non-qualified interest rates, it’s recommended you invest that money into raising your credit score first.

To make the best financial decision once you know what your interest rates will be, use a mortgage calculator to determine what your monthly instalments will come out to.

Credit Score For Down Payments

Your credit score will also factor into how much of a down payment you will need to put on your loan. Again the specifics of this number depends on how you’re lending from.

However, the number to keep in mind here is a score of above 580. This will qualify you for a down payment of around 3.5 percent on a FHA Loan. While a score below this could see that number rise to 10 percent.

The lower your score is the more of a down payment you will be required to put down.

If you can afford a sizable down payment, however, it’s a smart move to put as much as you can into that payment.

The more you put down the more ownership you will have over your home and the less you will need to pay in interest on the money you borrow.

Debt to Income ratio

To determine this, lenders will ask you to provide your monthly income and any significant debt you currently possess in order to find out your debt to income ratio.

Significant debt is usually qualified as any monthly payments that will extend beyond the next 11 months.

This ratio is fairly simple to determine. If you make $3000 a month and carry a monthly car and phone bill of $300, your debt to income ratio will be 10 percent.

The lower your debt to income ratio, the more a lender will be willing to give you.

In terms of home loan requirements, the important number to keep in mind here is 43 percent. If your debt to income ratio exceeds 43 percent, you will be unable to access a qualified mortgage made by a large lender.

There are, however, certain exceptions. “Small lenders,” or lenders with under $2 billion in assets and less than 500 mortgages over the last year, are allowed to offer qualified mortgages to people with a debt to income ratio of more than 43 percent.

Large lenders are also allowed to offer unqualified mortgages to those that exceed the 43 percent threshold. However, as stated above, these mortgages are usually burdened with higher interest rates.

Set Your Own Requirements

As you can see, home loan requirements can change radically based on who you’re borrowing from and how much you’re willing to pay in interest rates.

It’s important to remember that just because a mortgage lender approves your home loan, it doesn’t mean you can still afford to pay it.

Be sure that the loan you’re receiving is determined to be a qualified mortgage loan. Following the housing crisis of 2008, rules were put into place in an attempt to prevent people from qualifying for mortgages they actually can’t afford to pay back.

If you fail to meet these requirements, while you still may have options to receive an unqualified mortgage loan, you should pay attention to what that’s telling you.

Either the house you would like to buy is a bit out of your price range or you may need to clear up some existing debt before you enter the housing market.

Before you do anything else, determine what you think you can afford to pay on a monthly basis. Once you’ve determined that, you will be all set to apply online for a home loan.

Rick Woodruff
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