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Buying a home within the next 12 months?
Have you heard the story of someone saving and doing all they can to purchase a home, only to hear they are not qualified? Let’s help you prevent the unfortunate news no one wants to hear.
Homes aren’t usually bought with cash. Therefore, most buyers obtain a mortgage loan to finance their home. If you wish to purchase a home in the next 12 months, preparation is the key to having a successful closing. Lenders usually look at income, credit reports, and down payment.
Income
Lenders typically look for a two-year history of consistent employment. Minor gaps are allowed with reasonable explanation. If you are a salaried employee, lenders typically use the gross income (which means before taxes are taken out). If you are self-employed, lenders usually average the net income for the last two years. Some mortgage programs will also qualify you based on your most recent net income on your tax return if you have been in business for over 5 years.
Other acceptable income includes social security income, disability income, child support, and alimony. These incomes are usable if they are likely to be continued for 3 years.
Credit
Lenders analyze credit reports, they focus on payment history and monthly debt obligation.
My suggested amount of credit accounts is five including your car loan and student loans. Specifically, three to four credit cards. Please note that loans can also be made with limited or no credit.
How much monthly obligation is too much? Monthly obligation refers to the minimum payment on your credit report as it relates to credit cards, car payments or installment loans. Other monthly payments which can be considered as monthly obligation are child support, alimony and IRS installment payments.
If you want to qualify for the maximum loan amount, keep your monthly obligations zero to ten percent of your monthly income. For example, if your income is $5000.00 per month, keep your monthly obligation at $500 or less.
Keep credit card usage to 10 percent or less. For example, if your available credit card limit is $10,000, keep the balance at zero to $1000.00.
Down Payment, Closing Costs and Prepaid Expenses
Lenders offer conventional mortgages with as little as 3% downpayment and FHA loans downpayment is 3.5%. Lenders and government agencies may also offer downpayment assistance.
In addition to the down payment, the buyer also has closing costs. Closing costs include but are not limited to lenders fees, credit report fees, appraisal fees, government fees and taxes to name a few.
Prepaid expenses can include but are not limited to prepaid insurance and property taxes which are placed in an escrow account. Most mortgage loan programs allow monetary gifts from family members that can be used towards down payment and closing costs.
Understanding debt to income Ratios (DTI)
The debt-to-income ratio is simply, your monthly mortgage payment and other monthly payments on your credit report expressed as a percentage of your monthly income.
For example, if your income is $5,000.00 per month, your new mortgage payment is $2,000.00 and your monthly obligation is a car payment of $500.00.
Then, your DTI is $2,500.00 / $5000.00 x 100, which is equal to 50%.
What makes up your mortgage payment?
· Principal & Interest (used to pay back the loan amount)
· Property Tax (Annual Taxes / 12)
· Property Insurance (Annual insurance /12)
· Mortgage Insurance (Loan with less than 20 percent down payment)
· Homeowners or Condo Association fee
How much can I afford?
If the three elements of the pre-approval process are within a lender’s guidelines, the DTI formula is used to determine your maximum monthly payment. The maximum monthly payment is essentially used to determine the price of a home you can qualify for.
In conclusion, if you plan to purchase in the next 12 months, keep your monthly obligations minimal, maintain your income or increase it, and save your down payment. Avoid major debts for example a car loan if possible. Avoid co-signing for additional debts because it results in additional monthly obligations. Finally, and arguably the most important, pay monthly obligations on time.
How do I get more information regarding the mortgage pre-approval process?
Speak to a licensed mortgage professional who can guide you through the process.
Leighton Grant
Innovative Mortgage
NMLS 2040998
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