Whether you are a first time home buyer or a seasoned pro, meeting with a loan officer can be an intimidating encounter. As you divulge your most intimate financial records to this stranger, you realize that the fate of your homeownership dream is in his hands.
Fortunately, the stress of this meeting can be dramatically alleviated by knowledge of your finances and the impact they have on your credit worthiness. It is also important to remember that most loan officers want you to get into a home; however they need to ensure that you do not represent a risky investment.
There are a number of different variables that lenders consider when you apply for a loan, including the following:
Cash for down payment and closing costs. Traditionally an acceptable down payment was 20 percent of the cost of the home; however the abundance of new mortgage derivatives today allow some buyer to get into homes with little or no down payments.
Credit history. Though average or poor credit will not preclude you from receiving a loan, it will probably result in a higher interest rate. Find out what your credit score is before filing a loan application, that way you will have plenty of time to dispute any inaccurate information.
Employment and debt. Lenders perfer to lend to borrowers who have a stable work history and have not switched employers recently or who are coming off a period of unemployment. This is not to say that your loan will be denied if your employment history is slightly tarnished, it just means that the more stable your record the better. Debt is typically measured by debt ratios (more information below) that measure your earning power against the amount of debt that you owe on.
If a debt-to-income ratio is too high, then there is a good possibility that the mortgage will not be approved. Until recently, a typical qualifying ratio was 28/36. The first number is termed the front end ratio and it is determined by dividing your proposed monthly housing expense (principal, interest, taxes, and insurance - also called PITI) by your gross monthly income (income before income tax).
The second number, back end ratio, is determined by dividing your total monthly debt (including proposed PITI) by your gross monthly income. A borrower with good credit, front end ratio under 29, and back end ratio under 37 would have no trouble qualifying for a mortgage.
Now that you know the different factors that impact the amount of home you can afford, your next meeting with a loan officer will go much more smoothly. I recommend that you perform these calculations before speaking with a lender so that you already have a good idea of where you stand.
If you are looking to buy a home in the next year make sure to stay away from major purchases on credit. Lenders typically use a debt to income ratio to determine how much financing will be available to the buyer. The amount of debt you have incurred, for example a car loan, will have a direct effect on how much home you can afford. Credit report inquiries are also recorded and a large number of inquiries could have a negative impact on your credit score.
One common complaint that is often expressed by homeowners is that their home does not have enough storage space. As a lack of space has more to do with how space is utilized, this problem is extremely easy to fix.
Slowed by frustratingly low inventory levels in many parts of the country, existing-home sales lost momentum in July and decreased year-over-year for the first time since November 2015, according to the National Association of Realtors®. Only the West region saw a monthly increase in closings in July.
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.2 percent to a seasonally adjusted annual rate of 5.39 million in July from 5.57 million in June. For only the second time in the last 21 months 2, sales are now below (1.6 percent) a year ago (5.48 million).
Lawrence Yun, NAR chief economist, says existing sales fell off track in July after steadily climbing the last four months. "Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month," he said. "Realtors® are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows."
Adds Yun, "Furthermore, with new condo construction barely budging and currently making up only a small sliver of multi-family construction, sales suffered last month as condo buyers faced even stiffer supply constraints than those looking to purchase a single-family home."
According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage dropped from 3.57 percent in June to 3.44 percent in July. Mortgage rates have now fallen five straight months and in July were the lowest since January 2013 (3.41 percent). The average commitment rate for all of 2015 was 3.85 percent.
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