Preparing to Buy a Home
The 2015 real estate outlook remains positive. One of the “speed bumps” mentioned in the graphic above is that mortgage accessibility is expected to remain tight. Preparing to work with a lender will go a long ways toward helping you qualify for that loan. Rather than letting the unknown discourage you from starting on the path to home ownership consider three items the lender will be looking at when reviewing your loan application:
Preparing to Apply for a Loan
- Credit score. Request a free credit report from each of the three major credit reporting agencies. Check for any errors on the report and check your credit score. For the best interest rate the score should be over 700. Some things to avoid when considering a home purchase are either opening or closing credit card accounts, buying a new car, paying any bills late, or racking up any new debt. At times a borrower finds they don’t have established credit history. A credit card that is used and paid in full each month along with an installment payment such as on a car loan will establish the credit history you need.
- Mortgage to income ratio. The first ratio the lender looks at compares the fixed costs of owning the home to the income. These fixed costs are also called PITI which refers to Principle, Interest, Taxes and Insurance. These housing expenses do not include maintenance on the home – which can be variable – but are the fixed expenses and should not be more than 28% of the income. Also called the front end ratio (28% limit for conventional loans).
- Debt to income ratio. The second ratio is the amount of debt you have compared to the amount of income. It’s best to keep this ratio below 30%. To see how well you are doing add up your monthly debt payments – recurring debt – then divide that figure by your gross monthly income. Recurring debt includes your mortgage payment, car loans, student loans, child support and the minimum payment on any outstanding credit card balances. Basically anything that you can’t easily cancel (for instance your cable bill is not considered recurring debt because although you pay it on a monthly basis you can cancel it at any time). Also called the back end ratio (36% limit for conventional loans).
If you find that your credit score is less than optimal or your ratios aren’t quite where they need to be for a conventional loan you may still qualify for a FHA loan. For details on the home loan process contact the Kradel Team and preparing to start the loan application process contact Pamela with Suntrust in Huntersville.
Diane and William Kradel